So you want to invest in stocks?
And, why not be a bit of a contrarian by getting in now … when the markets are all beat up, and there is doom and gloom around, that’s when most of the money in this world is made … so, if you do want to invest, how?
Well I covered a bit about this subject in a recent post, comparing Index Funds to ETF’s … but, I want to go into it just a little bit deeper:
First of all you need to understand what type of investor you are:
1. Are you a Speculator – living on the edge, trading stocks/options (i.e. gambling) type? Nothing wrong with that – you could be the next George Soros.
If you are, then sign up for some newsletters and courses, such as the Tycoon Report (has the added advantage of being free!)
2. Or, are you a Value Investor – buying cheap, holding for the long term type? Are you the next Warren Buffet? Obviously, nothing wrong with being the world’s richest man, either.
If you are the next WB, then buy yourself a copy of Rule # 1 Investing by Phil Town. It will tell you exactly HOW to value stocks (what measures to use) and WHEN to invest (what indicators to use).
3. If you don’t have the patience for the latter (2.), or the stomach for the former (1.), then buy yourself some units in a low cost Index Fund … keep buying … and, wait!
That’s it in a nutshell …
… but, wait you say … what about:
4. Mutual Funds – too expensive and 85% of fund managers don’t even beat the market
5. Growth Stocks – if you have no special skill or knowledge, what makes you think that you can beat the Fund managers in 4.? You can’t (unless, you are lucky … then you are really just back at 1.).
Did I miss anything?
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Great summary. I am going to stick with number 3, thank you. And if I want to invest like Warren Buffett, I’ll just buy BRK-B and save myself some time. 🙂
My investment strategy is two-fold. Part 1st of my portfolio consists uses the “lazy portfolio” approach investing in index funds using dollar cost averaging. The 2nd part of my portfolio is designated for market-timing (yes, it can be done). I recently wrote a few posts on the topic.
@ Pinyo – Nice to see you at m blog, since I tend to hover around your so much [everyone…Moolanomey is a GREAT Making Money 101 blog]. I agree with # 3 (coincidentally, so does the great WB, himself). But, one of these days you’ll convince yourself that your financial goals are too small then you’ll move to # 2.
BTW: You COULD just buy BKH-A – why slum it at -B 😉 – but, even Warren would agree that the smaller, direct investor can outplay him (BKH is too big/slow).
@ TStruck – Portfolio Part 1 is your SAVING strategy (you just happen to be using Index Funds rather than a piggy-bank).
Portfolio Part 2 is a SPECULATING (I like to think of this as a high/risk potentially high/reward ‘business’ specializing in buying/selling stocks) strategy. You need an INVESTING strategy as well (in your case, I suggest real-estate to partly diversify away from stocks).
… .. keep on truckin’, though! AJC.
Ofcourse, most publicly traded companies have the ESPP (employee stock purchase plan) which practically gaurantees a 15% return (minus whatever fees, give or take minor fluctiations). Not at all tax efficient, but fairly low risk (unless your company tanks).
@ blogrdoc – true … reminds me of a story: I went to work for a blue-chip IT company straight out of college. They had a pretty good stock purchase plan, but I didn’t buy any because I was SURE that I wouldn’t be there more than 2 years … 9.5 years later, I left share-less. Moral of the story: take all company ‘freebies’!
Well… obviously, you’ve done well for yourself anyway. But it’s funny b/c your story reminds me of my first job out of school and I decided not to buy a house since I was unsure if I’d be there for longer than the pay-out-period for owning a home. Unfortunately for me, my estimate of a 2-3 yr payout period was off by 2-3 years. 🙁
ACTIVE OR PASSIVE FUNDS?
I saw your reply to my post on Tickerhound, thanks.
As I wrote in my question, so many articles out there say that investing in managed funds is fairly pointless as they rarely beat the index over time. This did seem to make sense to me – after all how many people *really* know what’s going on? A lot of it is just down to luck, which will average out over time.
BUT – I can see a lot of funds which DO significantly outperform – and as I understand it the returns you see on a website like Morningstar include the annual costs, as this is worked into the price of the fund anyway. So when comparing with a tracker fund, you are comparing like with like.
I go through a broker that discounts funds and as a result enables you to invest in a large number of funds with zero upfront cost (no-load). With this in mind, does it make sense to go for a fund which has outperformed in the long-run? Of course, they may have outperformed as a result of taking more risk, and this is a fair point – however over the long, long term (15-20 yrs) surely this risk is reduced? It’s not like I’m putting all my cash in some crazy hedge fund.
I really want to get this right as I want to just buy 5-6 funds and leave them to dollar-cost average for 15-20 years. I feel like it’s worth the time to put in the research now and make the right decision.
Any further advice on this would be greatly, greatly appreciated.
@ Moresby Chief (is that New Guinea?) – thanks for a great question: now, I don’t invest in ‘product’ so I’m probably not the best person to ask, so I will refer you to the ‘highest source’ of advice on this particular subject that we can get, Warren Buffet, who says:
1. If you don’t know what you’re doing buy the whole market
2. Buy your stocks at the lowest cost – as the fund that charges more has to return that much more
3. Use the fewest intermediaries / middlemen … they all add to the cost.
I would add that history is not necessarily a great predictor of the future …
On the other hand, it is true that a few people do consistently beat the market: Warren Buffet is one! It may be that your fund is another … but, do you want to take that chance? If I was going to ‘choose’ fund managers, I would rather become an expert in choosing stocks … and cut out ALL the middlemen!
Great! Thanks for the advice. I’m adding you to my favorites.
@ Iris – Thanks! Let me know your progress as you go along …
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