If you want to invest in the stock market to plump up your nest egg, that’s an excellent idea. Few investments can build wealth over the long run as effectively as stocks. Be sure to go about it with the proper perspective, though, so that you can tell the difference between what is investment success and what is underperformance. Let me share a couple of examples.
Patience, Grasshopper
For starters, imagine that you invested in Mesabi Trust (NYSE:MSB) about a year ago and you’re down some 20% on your investment. Your holding might be looking to you like an answer to the question, “What is investment panic, Alex?” But don’t be so hasty. Ask yourself why you bought it. Mesabi Trust (NYSE:MSB) is a royalty trust that receives and then pays out to shareholders a portion of the proceeds from iron mined by a Cliffs Natural Resources Inc (NYSE:CLF) subsidiary. Some might avoid it because royalty trusts often have expiration dates, but it’s worth noting that Mesabi Trust (NYSE:MSB)’s is rather far away. But slowdown in demand for ore is a concern, one that has been an issue for Cliffs, too.
Mind the dividends
When evaluating what is investment success, be sure to factor in dividends. Mesabi Trust (NYSE:MSB), for example, has been a generous dividend payer, though its payouts are lumpy, tied to the fortunes of mines. Add together the past four quarters’ dividends, though, and you’re looking at a recent yield topping 10%!
Focus on the long term
Mesabi Trust (NYSE:MSB) stock has gone up and down considerably over relatively short periods. It lost an annual average of roughly 14% over the past two years, and averaged a gain of only about 4.6% over the past five years. But over the past decade? The average is 26%. Over the past 20 years: 24%. That’s powerful growth and success.
Compare to benchmarks
It’s also smart to compare a stock’s performance with relevant benchmarks. Think of glass and fiber giant Corning Incorporated (NYSE:GLW), for example. Many see it as undervalued and have high hopes for its Gorilla Glass and its flexible Willow Glass, but it’s also been whacked by a sluggish LCD market. Thus, it has been struggling some in recent years.
Over the past five years, for example, Corning Incorporated (NYSE:GLW) lost an average of about 9.3%, while the S&P 500 gained 5.7%. That’s a big difference. Over the past year, though, as of a few days ago, it was up 24%. That should seem terrific to most folks, and in a sense it is. But consider that over the same period, the S&P 500 gained almost 29%. One year is a rather short period to assess, though, so let’s back up. Over the past decade, Corning Incorporated (NYSE:GLW) stock averaged 8.8% growth annually. If that seems modest, compare it to a benchmark such as the S&P 500, which gained 7.7% over that period. If your investments don’t beat their benchmarks over significant periods, consider just investing in the benchmarks – or elsewhere.
Stay the course
To distinguish what is investment success from what is investment underperformance, take the above factors into account. Think, too, about inflation. If you’re not beating it, then you’re losing purchasing power over time. And think about your alternatives, too. If you’re all in bonds and they’re doing well, you might still want to add stocks to the mix, as they tend to beat bonds.
The article What Is Investment Success? This. originally appeared on Fool.com and is written by Selena Maranjian.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Corning. The Motley Fool recommends and owns shares of Corning.
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