We can’t stop reading Money’s special report, How to Reach $1 Million.
It’s not that we’re greedy. We just want $1 million. So we can broker peace for our time, cure several major diseases and buy everyone in the world a soft drink, or something like that.
And remodel our laundry room.
Which according to one article in the series, “Invest Your Way to $1 Million,” might not be the wisest move. (Go for the master bath or kitchen.)
This selection from the series generally suggests that investors go for the highest possible return on equity, whether in buying stocks or even remodeling their homes.
As for stocks, the article says: “Why focus on ROE? In theory, over the long run, that higher profitability will eventually be reflected in a company’s share price. And this is borne out in reality.
“The MSCI USA Quality Index of high-ROE companies with stable earnings growth posted annualized returns of 11.6% over the past quarter-century — 1.7 points better than the S&P 500. At that rate, a $100,000 investment would grow to $1 million in 21 years, or four years sooner than via the broad market.”
Drawing from a past BetterInvesting Magazine article by Ronald W. Chan and Brian C. Lui, return on equity measures an owner’s gain on investment. The equation to calculate ROE is:
Return on Equity = Net Income/Shareholders’ Equity
“Return on equity is a powerful tool, but it’s backward-looking: The smart investor employs it to evaluate the quality of a company,” according to the BetterInvesting Magazine article. “One of the drawbacks of ROE is that it’s based entirely on income statement figures and the book value of assets.
“All in all, ROE is much more useful when it’s employed to look at the same company over time. Used in this manner, it can provide an enlightening picture of the company’s historical performance.”
But don’t, Money cautions, act like a shortsighted CEO by honing in on short-term profits alone:
“Researchers at Jensen Investment Management found that shares of firms with ROEs of 15 or higher for 10 straight years are 35% less volatile than the broad market. And other research shows that low-volatility stocks tend to outperform in the long run.”
BetterInvesting is a national nonprofit organization that has been empowering individual investors since 1951. Founded in Detroit, the association (formerly known as National Association of Investors Corporation) was born out of the conviction that anyone can become a successful long-term investor by following commonsense investing practices. BetterInvesting has helped more than 5 million people become better, more informed investors by providing webinars, in-person events, easy-to-use online tools for analyzing stocks and mutual funds, a monthly magazine and a community of volunteers and like-minded investors. For more information about BetterInvesting, visit its website at http://www.betterinvesting.org/investing/landing/openhouse/blog/index.html or call toll free (877) 275-6242.