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The Suitability Of Stock Investment For You

When choosing an investment, there are always many alternatives and as such it should be possible to pick the perfect thing. Despite the informational bias on this site, stocks and equities are not usually suitable for everyone or on every occasion. Therefore, the suitability of stock investments for you, the individual, is and always should be an issue to consider.

In most five to seven year periods, the returns of stocks and shares has comfortably beaten inflation in the major markets and economies. But, as is always repeated, past performance is not necessarily a guide to the future.

The general increase in business and productivity results has worked its way into long term rising capital prices and dividend incomes. This in turn leads into increased performance of pooled equity products such as mutual funds, unit trusts, life assurance investment products, SICAVs and more.

There have been incredible short term fluctuations in capital values. It is this volatility that prompts advisers and writers everywhere to mention the 'medium term' as a minimum holding period. The income stream from dividends has, however, proved to be relatively stable.

Stock market based investments offer an opportunity to make a real and positive return on an investment. Yet, they should only be considered by people with a time frame of at least five years.

The suitability of stock investment is very low for people with a short time scale and those who cannot afford to see their investment lose value - even if only on a temporary basis. Direct investment in companies on the stock market can be very risky. Is the stock market for beginners? And more importantly, is the stock market for you? Click here for some sound advice for beginners .

General financial planning principles recommend that any individual uses spare money for other things before making direct equity investments. For example, it is important that an emergency fund be made and held in a cash account should there be a short term requirement for money.

Other longer term financial products should also be considered. These should include Certificates of Deposit, timed deposits, bonds and debt instruments.

One often used calculation used to guide investment portfolio planning is to start from a position of 50/50. That is 50% in the stock market and 50% in bonds (bonds are debt instruments that have fixed repayment terms and maturity dates and are thus considered to be lower risk).

From that 50/50 start, a number of calculations offer guidance by lowering the proportion to be invested in the stock market by considering the age of the investor. The general investment consensus is that the older an individual is, the less risk they ought to be taking in the market (since most people will need to preserve capital and use it to generate an income in retirement).

Many individuals will therefore find that their professional guidance suggests a split of somewhere around 60/40 to 70/30 (bonds/stocks).

For many people, a much more sensible option than any investment will be the repayment of short term debt. These might be credit or store cards or overdrafts - essentially, anything with a high compound interest rate should be repaid before investing directly into stocks.

Once this repayment is complete, it is usually advisable for an investor to start with some form of collective investment, such as a mutual fund or unit trust. This lowers the risk involved in the investment and hopefully provides time for the individual to get used to seeing annual reports and reading more about the economy and market in the daily news (we all take economics much more seriously when our own money is invested!).

As Wall Street Journal writer Robert Frank discusses in his 2011 book The High Beta Rich, a lot can go wrong when all of a person's net worth is invested in the stock market.

To quote the above book review, "If someone has a stock portfolio of, for example, $100m, it does not represent real wealth. Rather it is a claim on the profits that it is believed the underlying companies are likely to make in the future. If expectations change, the value of the portfolio can easily slump, as many of the wealthy have discovered to their horror."

Therefore, it is vital to understand the idea of personal liquidity as it relates to outgoings and debts to understand the true suitability of stock investment for an individual.

We hope that readers will take heed of these warnings and assess their financial planning from a logical and conservative perspective.