In an article yesterday I wrote about the risk of investing in equities. However the benefits of investing in stocks far outweigh the risks. In  my earlier article I mentioned the Cyprus market that has declined by over 99% in the past few years. But that market is tiny and in the global investing landscape is not considered as a market with any significance.

Some of the benefits of investing in stocks over other assets are listed below:

1. It has been proven in many studies that stocks outperform bonds and other asset classes over the long-term. Not only do stocks outperform in the long-run but they are also excellent options to beat inflation.
2. Some stocks pay dividends periodically such each quarter for most US firms. This make them attractive for income investors.
3. In addition to regular dividend payments, companies can also pay special dividends as they wish. For example, when higher taxes on dividends came into effect many years ago some firms paid a special dividend before the tax law effective date. Some companies pay a special dividend at the end of the year to reward loyal shareholders.  For example, US-based Glacier Bancorp, Inc. (GBCI) announced a $0.30 dividend at the end of last year.
4. Unlike bonds, taxes are charged at a lower rate for dividends paid out by firms.Dividends for stocks held over a year get a lower tax rate as they are considered as “Qualified Dividends”. Interest payments from bonds are usually taxed at ordinary income tax rate.
5. Companies can also have spinoffs in which case existing shareholders will receive additional shares of the new firm. Holding other assets like ETFs or mutual funds do not have this advantage. For example, when Reckitt Benckiser Group plc (RBGLY) spun off Indivior PLC existing shareholders were assigned a certain amount of Indivior PLC(INVVY) shares.
6. For foreign stocks, some companies pay dividends in cash or additional shares. When cash option is chosen dividend withholding taxes have to paid. But choosing the shares option avoids this tax.
7. When companies raise cash with a rights issue, current holders are entitled to receive additional shares usually at a discount or receive cash payments instead of rights.
8. ETFs and other funds can be shutdown by the provider and cash returned to holders at any time at the discretion of the provider. Stocks do not have this issue. Unless a firm is delisted or goes bankrupt or merges with another firm, a stock will continue to trade.
9. One company may be acquired by another company sometimes at a premium. In such cases, holders of the target firm can reap substantial gains. This does not happen with mutual funds or ETFs.
10. By holding stocks an investor controls all the issues related to taxes related to dividends, withholding taxes for foreign dividends, capital gains, etc. But when holding a mutual fund for example, the fund company controls all the tax-related matters. For instance, at the end of the year a fund may pay our a huge capital gains distribution and fund holder will be hit with taxes on this payment.

Disclosure: Long INVVY, RBGLY, GBCI

Stocks are a risky asset class.Investing in stocks is not suitable for all and it is possible to lose one’s investment easily.

The volatility in global equity markets has shaken some investors. However the current fall is nothing compared to performance of some markets. For example, the Cyprus stock market is down by an astonishing 99.74% since Oct 2006 as shown in the chart below:

Click to enlarge

Source: Google Finance

In late 2007 the Dow Jones Cyprus Total Stock Market Index made a high of 1,630. From that peak it reached a new low of 2.75 late last year for a decline of 99.986%.

Hence a €10,000 investment in 2007 would now be worth just €1.40, according to one news report. That is indeed shocking !!.

Cyprus is one of the very few countries in the world that forced two bail-ins on its citizens to rescue its crumbling banks.No wonder the equity market practically went to zero.

The key takeaway here is that stocks can plunge as low as possible including and upto 0%.So as long as one does not use margins, the loss will be limited to the invested amount.

Equity markets worldwide have had a bad start this year with the S&P 500 down so far about 6% just in one week. Other developed and emerging markets as well are in the red.

As this China-induced selloff continues here are some thoughts:

China triggered a global selloff last summer also.And then markets recovered as China intervened with new rules to prevent a total collapse. it remains to be seen if China can cause the global economy to enter into a recession or even a depression.

Unlike other emerging countries, the majority of Chinese equities are NOT held by foreign investors or institutions. Instead the domestic retail investor hold most of the stocks. According to one estimate, just 2% of the Chinese stocks are owned by foreign investors.

Domestic retail investors are prone to follow the herd mentality and are likely to cause volatility of extreme proportions. For example, lack of maturity and long-term thinking drives individual investors to panic when they the markets is a sea of blood red and others sell.

Though countries dependent on China and oil-exporting countries are adversely impacted due to the current situation, it does not mean there no opportunities to be found anywhere. For example, many developed world companies are not highly tied to China or rely on the price of crude oil.

There are always stocks worth buying regardless of the market conditions. Even if the market has entered a bear market, it is impossible for an ordinary investors to wait for the perfect time to pick a stock at the trough. Simply put identifying a bottom is almost impossible.

So despite the current decline in stock prices, there are stocks worth buying at current or lower prices. Wise investors usually take advantage of volatile markets as bargains can be found easily.

Investors with a long-term view can monitor the following foreign stocks for potential additions to their portfolios in a phased manner;

1. Continental AG (CTTAY)
2. Novo Nordisk A/S (NVO)
3. Safran SA (SAFRY)
4. Nordea Bank AB (NRBAY)
5. Fresenius Medical Care AG & Co (FMS)
6. DBS Group Holdings Ltd(DBSDY)
7. Reckitt Benckiser Group plc (RBGLY)
8. AstraZeneca PLC (AZN)
9. Fomento Economico Mexicano SAB de CV (FMX)
10. Edp Energias De Portugal SA (EDPFY)

Disclosure: Long RBGLY

UPDATE: The Callan Periodic Table of Investment Returns 2016: A Review  ***(New)

Callan Associates recently published their famous Periodic Table of Investment Returns for 2015. This chart shows the importance of diversification.

The Callan Periodic Table of Investment Returns for 2015 is shown below:

Click to enlarge

Source: Callan Associates

For example, the S&P 500 total return last year was 1.38%. On a price return basis it was actually negative at -0.73%. When dividends are included the negative returns turns positive. This is an important point to remember since most media outlets report the price return and not the total return.

Emerging markets has another disastrous year with the MSCI Emerging Markets Index losing over 14%. For the third year in a row, emerging stocks have had negative returns.

Download: The Callan Periodic Table of Investment Returns 2015 (in pdf)

Related ETFs:

• iShares Dow Jones Select Dividend ETF (DVY)
• SPDR S&P Dividend ETF (SDY)
• Vanguard Dividend Appreciation ETF (VIG)
• SPDR S&P 400 Mid Cap Growth ETF (MDYG)
• iShares Russell Midcap Index Fund (IWR)
• iShares MSCI Emerging Markets Indx (EEM)
• SPDR S&P 500 ETF (SPY)
• SPDR STOXX Europe 50 ETF (FEU)

Disclosure: No Positions

Related: The Callan Periodic Table of Investment Returns 2016: A Review