Money may not buy happiness, but I think we can all agree that it helps us enjoy a better quality of life. A life where we can travel often, order whatever we want off the menu, sit front-row at our favorite concert, you get the picture. None of that is possible, however, if at the end of each month you find yourself with less and less disposable income. This is why we strongly encourage you to grow your money within the financial markets so that you get to enjoy life a little more often.
Bonds, stocks, real estate, cash, commodities…these are all financial instruments that make up a diversified portfolio. The prices of these assets do not exactly move in lockstep. While some may experience price increases, others decrease, which provides protection from price swings. This protection thus smoothes out price movements over time. Now that we have a diversified portfolio, how much weight should we put into each asset? Amongst the various needs an individual might have, we have market-related reasons for owning each type of asset class. Many don’t realize that the payout you get on equities (stocks) over time come from many different places. Once you can understand why we hold an asset like equities, you can then understand what will make your money grow.
When it comes to equities, your return can come from: dividends, future earnings growth, market sentiment, and inflation. If a company issues dividends, they will regularly pay its shareholders a sum of money out of their profits. Your return can also come from future earnings growth, which means that the value of a stock rises when a company increases its earnings. Market sentiment, on the other hand, is one that dramatically drives the price of the stock in the short to medium term. The hot stocks at the moment have people paying upwards of $80 per $1 that the company makes. These people expect the company’s earnings to grow into that price, meaning earnings will increase rapidly. This, however, is largely based on expectations. As you may know, expectations don’t always translate to reality, so in the long run, the power of the company’s actual results drives the price. The last component of a stock’s return is inflation. Inflation is the concept that we expect to pay more for something in the future than we do now. This inflation of prices is baked into the earnings of a company. For example, McDonald’s sells a cheeseburger for $1.00 now, but in five years it might become a $1.50 menu item. This increase in revenue flows through to profit, so the company is worth more in dollar terms later.
At Fogel Capital Management, we pride ourselves on constructing our clients’ portfolios with diversification and long-term planning in mind. We have over 20 years of investing experience and know exactly how to utilize data to make investments that fit your risk tolerance and help you enjoy life with the money you worked hard for. Call (772) 223-9686 for a free portfolio consultation or to get started on constructing your portfolio today.