Although it costs a small amount to play the lottery, the chances of winning are clearly exceptionally low. But yet, millions of people play the lottery on a regular basis in the hope of becoming millionaires.
However, there is a better way to become a millionaire. Investing in the stock market made Warren Buffett a billionaire, and the chances of you following in his footsteps are higher through buying shares than buying lottery tickets.
Of course, buying shares is almost as easy as buying a lottery ticket. The advent of the internet was a game changer for private investors. Today it costs a fraction of the price from even a couple of decades ago to buy and sell shares. And with lower transaction costs comes an opportunity to more easily diversify the stocks you own. This reduces the risk profile of a portfolio and could also allow access to a wider range of sectors than would have been the case in the past.
However, the major allure of shares at the moment is the outlook for the global economy. Certainly, there are challenges on the horizon including US interest rate rises, the US Presidential election and difficulties in the EU. As such, the short term outlook for the world economy is uncertain. But looking further ahead, share prices are likely to rise significantly across the board due to favourable economic circumstances.
A key factor behind these favourable economic circumstances is the improving performance of the US and Chinese economies. As the two largest economies on earth, they matter to the performance of companies across the globe.
In the case of China, its transition from being a capital expenditure-led economy to a consumer-led economy will not be frictionless. There will be difficult periods as has been the case in the last year. However, with disposable incomes forecast to rise by 41% between now and 2020 in China, there are opportunities for consumer goods, financial and services companies to grow their earnings.
Similarly, the US economy is performing relatively well. Recent economic data has been strong and while there is the possibility of further interest rate rises over the medium term, the reality is that the Federal Reserve is likely to provide a relatively dovish stance in future. Therefore, the prospects for an economic recovery which is choked off by monetary policy tightening seem slim. This provides opportunities for investors to benefit from owning US-focused stocks over the long term.
In term of commodity prices, the price of oil has stabilised in 2016. Although further rises are highly dependent upon the interaction between supply and demand, there are opportunities for long term investors to buy shares in energy companies at discounted prices. Furthermore, mining companies are also adapting to lower commodity prices through cost reductions and efficiencies. This could positively catalyse their earnings – especially if the prices of iron ore, copper and other commodities move upwards in the long run.
Clearly, investing in shares is not risk free and volatility could be high in the coming months. However by diversifying, seeking out opportunities in undervalued sectors and thinking long term, it is very possible to become a millionaire through buying shares. Certainly, the chances of that happening are higher than the prospect of winning the lottery!
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