Why Do You Need To Invest On The Stock Exchange?
Whether we as individuals may like it or not, there are two very major trends which are forcing us to invest on the stock exchange. These are massive trends which will be very difficult for the majority to avoid and as such, will provide vast new amounts of incoming money to the markets.
Both of these trends relate to the increasing cost of retirement which in turn is linked to longer life expectancy and the effects of a massive aging population.
Firstly, as we know, most major employers are moving away from the final-salary pension schemes of old. The promises made by employers are proving to be very expensive to keep and as such, current corporate management is trying to lower or remove this burden.
The second major trend is the devaluing of state retirement benefits. Of course, this differs from country to country, but the trend is for pensioners to receive less, not more benefits.
This combination means that responsibility for retirement planning is being placed very firmly on the shoulders of the individual. Many people seem to be still largely unaware of this change, but it is happening all the same.
Therefore, by definition, individuals are having to take more responsibility and start understanding investment funds, stock exchange indices, asset allocation and much more.
Suddenly, investors need to decide whether they want to focus on alpha or beta. For the lay person, this means either trusting in the skill of an investment management to outperform the market, or, relying on the market and investing passively in an index. This is a very difficult call to make.
Should an investor stick with the more traditional unit linked funds investing on the stock exchange and bond markets, or look to more adventurous areas such as hedge funds, property and commodities? Can an investor protect themselves from the potential swings in the market by diversification?
For those that wish to avoid the complexities and rely on a managed fund, choosing a manager can be hard to do. Even the legendary Bill Miller who had beat the S&P 500 for an incredible 15 consecutive years has just had 2 poor years in a row.
In fact, the average US mutual fund investor averages much lower returns than are possible. This is in part due to the unfortunate habit of private investors to jump onto an investment bandwagon and buy into hot funds at the top of the market. Some studies suggest that this causes most investors to earn a massive five percent less each year than the S&P 500 index.
Such mistakes are primarily due to a lack of understanding. Private investors often lack economic, business, political, financial or stock exchange knowledge - and this can prove to be very expensive. At the most extreme, this may prove to be the difference between a prosperous or a poor old age.
Moving into ever greater prominence for the private investor is a relatively new form of fund, that of the ETF. An exchange traded fund is a flexible investment vehicle that primarily uses computer modelling to replicate an index or asset with very low annual fees.
All these things really prove is that the private investor needs to understand the stock exchange and it's workings more and more - and that an ever greater number of people need to become private investors. This will be a massive change in how individuals are responsible for their own affairs.
Whilst this offers the potential for booming times for the fund management industry, it also offers opportunity for many others including financial and investment advisors, stock market publications and stockbrokers.
