The conventional wisdom has been that, over time, investing in stocks has been a solid idea for building wealth. The numbers generally support the notion that a diversified stock portfolio that reflected the total market has delivered a better than decent return.
The financial crisis that began in 2007 and led to a broad decline of 50% or more across the major indexes shook the confidence of many stock investors.
The crisis was not the first time such drops in the general stock market occurred. Following the dot.com bust beginning in 1999, the stock market collapsed.
What didn't happen in that disaster was an accompanying near collapse of the total financial sector. Major banks, trading firms, manufacturers and others required billions in federal dollars to remain in business - even then, some didn't survive intact.
The personal real estate market went into free fall and people saw their equity disappear and many ended up owing more than the balance on their mortgage. Combined with unprecedented unemployment, millions of homes were lost to foreclosure.
The triple slam of the stock market (and many private retirement plans) collapse, the housing market free-fall and loss of job (or at least, the fear of losing your job) sent stock investors running from the market.
The problem is where will stock investors find the returns (with some degree of safety) that the stock market and real estate previously provided?
When interest rates are low, saving instruments pay almost nothing.
The answer, at least for some stock investors, is to dial down the percentage of their investments (particularly stocks for older investors) and stick to high-quality companies with solid track records.
There is no guarantee on the return of any stock, however, despite the difficult challenges facing investors, stocks remain one of the best avenues for building wealth over time.
The key phrase here is "over time." For many stock investors, the key lesson of the financial disasters is you can't put your investing on automatic and forget about it. This doesn't mean trading in and out of the market, but it does mean being careful and keeping your eyes open to impending major changes that could impact your stocks.
