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Be an Owner

IT SEEMS ALMOST everything can be rented today—clothes, movies, music—and often renting makes financial sense. Still, it isn’t the road to wealth. When it comes to key parts of our financial life, we should strive to be owners—provided we have a long enough time horizon.

For instance, if we plan to keep a car for more than three years, we’re usually better off buying rather than leasing. Indeed, that’s typically the only option with a used car, which will usually be the best deal financially. Similarly, if we can see staying put for at least five years—and preferably seven years or longer—we should buy a home, rather than renting. We need that five-year-plus time horizon to overcome the hefty cost of first buying and later selling a home. In addition, that longer time horizon means we’re more likely to enjoy rising real estate prices.

And if we’re investing for long-term goals, we’ll want to invest in the stock market—and thereby become part owners of corporations—rather than renting out our money in return for interest, which is what happens when we buy bonds and certificates of deposit.

If we purchase stocks, how much time do we need if we want to be reasonably confident of making money? Probably, we should have at least a 10-year time horizon. That’ll give us five years to make money and then another five years to find an opportune time to sell. If, after the initial five years, the stock market is in a slump, we might hang tough and wait for higher prices before selling.

Next: Risk and Reward

Previous: Human Capital

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