It doesn't matter whether you're young or old, investing in the stock market could be one of the best financial decisions you ever make.
Sure, there are risks involved but overtime, buying and holding stocks is a simple way to generate a retirement nest egg which you can truly be proud of.
As Motley Fool writer Tim McArthur points out in this article, a regular monthly investment of just $200, with profits reinvested, could turn into over $1.2 million in 40 years. That is, if you can achieve a 10% return per year.
"That's great, but how do I achieve a 10% return each and every year?" I hear you say.
Well, when you consider the Australian stock market has returned an average of 12% per year since January 1900, the challenge appears very realistic.
What's more, some Australian blue-chip stocks are currently offering dividend yields in excess of 5%. Meaning, if you reinvest those distributions, the share price of a particular company need only move another 5% and you've got yourself a 10% return.
However, there is one major pitfall to this absurdly simple investment strategy: It's not an easy thing to do.
For example, companies like Macquarie Group Ltd (ASX: MQG), Westpac Banking Corp (ASX: WBC) and Insurance Australia Group ltd (ASX: IAG) are currently changing hands on forecast grossed-up dividend yields of 5.8%, 8.3% and 8.9%, respectively. They appear obvious stock picks for the ultra-long-term investor.
However, although the market has proven it will go higher over time, individual stock prices go up and down. Sometimes, like during the GFC, share prices will fall so hard they'll take many years to recover. Dividends will also take a hit.
That's why it's integral long-term investors look at much more than just a stock's forecast dividend yield or P/E ratio. However the most important thing to remember is, no stock is a buy at any price.
Buy, Hold, or Sell?
Macquarie, IAG and Westpac are great companies but, unfortunately, their share prices reflect it. So I think they're best left on the watchlist for now.
