John P. Napolitano’s Making Cents column
The dramatic fluctuations seen in the stock market in recent weeks have a lot of people wondering if investing in stocks holds much merit. Money markets, certificates of deposit and other standard practices of saving may seem more appealing to some during these roller-coaster trading days, but it may be in an investor's best interest to maintain a sensible view of the stock market, particularly if you're a baby boomer (born between 1946 and 1964).
A report from the Centers for Medicare and Medicaid Services suggests that medical inflation could be as high as 6.3 percent over the period from 2005 to 2015. At that rate, baby boomers are likely to experience a decrease in their purchasing power if they are over-allocated to a fixed-income and cash, and not at least partially invested in stocks.
Varieties of available common stock:
- Blue chips: Refers to the stock offerings of the country's largest and most prestigious companies.
- Established growth: These companies are large enough to be well-established and are often well-known, but remain small enough to have the possibility of strong growth.
- Emerging growth: These companies are typically small and often have greater volatility and the potential for substantial growth.
- Penny stocks: These stocks represent ownership in companies that may still be very small. Penny stocks typically sell for less than $1 a share.
So why should stocks represent such a portion of a well-rounded portfolio? Unlike certificates of deposit and bonds, common stock offers the potential for large gains - sometimes double-digit increases. And any potential loss is limited to the amount of the initial investment. But when concerns kick in, most common stocks can be sold quickly, albeit at a loss.
Although every share of common stock represents a proportional ownership or equity in a company, ``passive stockholders,'' or those who are not active in running the company, are protected against legal liability resulting from the company's actions.
Over the long term, common stock investment can be a good guard against inflation. Historically, common shares have offered higher returns than other investments.
There's no denying that the stock market will experience upheavals, but if you're in it for the long haul, your portfolio may benefit from common stock ownership.
John P. Napolitano is the CEO of U.S. Wealth Management in Braintree. Do you have a financial issue you want him to answer? E-mail him at firstname.lastname@example.org or call him at 617-786-7073.