When I was a kid, I had an early introduction to stocks and investing. I consider myself lucky. Not every kid age gets the kind of intro I got at 11 years of age. Some don’t get an introduction to it at all, ever.
And it’s then not until adulthood that investing suddenly pops up on the radar. Worse, some don’t even put investing on the radar until it’s getting closer to that point in life when you’re supposed to retire.
If you’re thinking about retirement and starting investment at about the same time, I hate to tell you but you’re a bit late to the party. Still, that doesn’t mean you should put it off any longer, it’s never too late to start.
It’s also never too early to start, either.
I plan on educating my kids on investment as soon as they can understand what Daddy does and what bitcoin is. But that’s a separate conversation.
The point is that for 25 years now, I’ve had an understanding about the long-term benefits on investment. The power of time-frame, the power of equities, the power of dividends, compounding returns, and having an investment plan are second nature.
But for many, those core principles are easily learnt, but easily forgotten.
How high can they go? Answer: higher
Recently I was having a conversation with someone I considered to be pretty clued up on the markets.
They said to me they thought the Australian stock market was in a, ‘bit of a bubble’. They also said to my astonishment, ‘stocks can’t go much higher, can they?’
It meant I had to put my teacher’s hat on and give a re-education on how markets work.
For a start, we know that long-term, even with peaks and troughs and bubbles and busts, equities are the best performing asset class. We exclude cryptocurrency from this discussion for now, because of their limited history.
But when you push the boat out for 20, 30, 40 years, you can see the ASX has been on a continuous path higher. You can’t dispute this.
What you can dispute is entry and exit points. Equities investment is volatile. We also know this because when you seek higher returns, you inevitably take on more risk. This is the risk/return trade off we play with whenever we invest in anything.
This is how capital markets work.
But when you smooth out the peaks and troughs in the wider market, there is only one direction. That means if you subscribe to the idea that ‘stocks can’t go much higher,’ you need to add in just what kind of timeframe you’re talking about.
If you’re looking at the next 6–12 months, then maybe you’re right. If you’re talking about the next 6–12 years, my bet is that you’ll be wildly wrong.
Now, I will throw in the disclaimer that we truly have no definitive proof as to what is going to happen to markets in the future. But we do know that companies perform in all kinds of market conditions.
We also know that, historically, you can’t deny the long-term trend. And hence, when you extrapolate how markets typically behave, add in the right time frame, and we’re pretty confident that investing in equities is still the best long-term strategy for building wealth.
Hence why the earlier you start, the better you are for it. You’ve got the time to ride out any wild bubbles and busts that we might see, like the dotcom bubble and the 2008 market crash.
This is why when we see people petrified of what’s coming next we try to chill them out. It will be OK. Markets chop and change, but they do also sort themselves out.
Now maybe there’s a market event the likes we’ve never seen before brewing. Maybe it all goes through a massive reset and decades of growth are wiped out in one foul swoop and all wealth is eroded.
But ask yourself, what do you really think the chances of that happening are? And even if it does happen, will that really be the end of it all? Or will markets continue on?
Also, in that situation, have you adequately prepared your ‘zombie apocalypse investment plan’? By that I mean looked at alternative asset classes…like crypto?
The real punter’s paradise
Look, I don’t see this crazy market crash coming. Sure, there are some companies that are trading at eye-watering multiples. There are some that are hugely inflated in price and hype.
And then there are plenty that are a little more boring. They turn a profit, trade at single-digit multiples and pay out a dividend. These don’t get much airtime in the mainstream. They dwell in the depths of the 2,000-odd stocks on the ASX with market capitalisations less than $500 million.
In the past, I’ve called these small and microcap stocks the ‘Golden Geese’ of the ASX. Tiny, under-the-radar companies that are profitable and pay a dividend. These are the perfect stocks to be looking at when building a long-term portfolio that can weather all kinds of storms, and still benefit when the sun is shining.
The kinds of stocks that you’ve probably not heard of like, Mayfield Childcare Ltd [ASX:MFD], Fiducian Group Ltd [ASX:FID], Probiotec Ltd [ASX:PBP] or PTB Group Ltd [ASX:PTB].
These are all small-cap stocks, profitable that pay a dividend. They don’t all trade for massive Price-to-Earnings ratios and have shown they’re capable of growth. These are the gems that exist on the ASX that you rarely hear about but are abundant if you know where and how to look.
It’s easy to look at things from the top down and say, ‘yep the market is overpriced and may be due for a correction.’ But when you really look deeper, you quickly forget the noise and realise that great stocks can still be found in the ASX and when you’ve got the right knowledge, the right mindset and the right time horizon it can be an absolute punters paradise!
Editor, Money Morning
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX, in particular small-cap stocks. Learn all about it here.