Advice for a small investor …

Glossary asks:

With limited funds at ones disposal, say in the 10K to 40K range, what are the arguments for and against buying outright low price stocks to accumulate more shares than would be possible with higher priced stocks. Or, alternately, of using call or put options to purchase stocks of any share price?

To which the ‘common wisdom’ response was:

Whether you are a “big investor” or a “small investor” doesn’t matter as much as you think, IMHO. Nobody likes to lose their money. Everybody needs the same general principles when it comes to investing.

Figure out your risk tolerance. The market is volatile. If your investment drops 10% will you be up nights puking your guts out into the porcelin throne?

Never put all your eggs in one basket. This means only 2%-4% in any one investment AND make your individual investments in different types of investments such as large cap value and medium cap growth.

But, you know my take on this by now: if you diversify your investments, then expect to get ‘market returns’ or less …

LESS to the extent of fees and the losses that you can expect from mis-timing the market … which the Dalbar Study shows will be often and the cost of these mistakes will be very, very, expensive:

Fees: Of these, the fees are the reason why even the most disciplined investors (even 75% of Mutual Funds) perform worse than the market.

Market Timing: But, it is the second – the market timing risks – that mostly affect smaller/individual investors: it’s the reason why the Dalbar Study found that during a long period where the S&P 500 grew at an average rate of 11.9% ‘smaller investors’ only managed a paltry 3.9% return … they would have been better off in CD’s!

So, here is my suggestion:

A. If you want ‘passive investments’ and are satisfied with market returns (circa 9% AFTER inflation … current market aside) then plonk your money in a low-cost S&P 500 Index Fund and let it sit until you retire … add to this investment as much and as often as you can.

OR

B. If you want (need?) ‘above average’ market returns – and, are prepared to ‘gamble while you learn’ (the price of an investment education) – then pick an investment that you can study up on and DO NOT diversify into that asset class; instead, put all of your eggs into no more than 4 or 5 baskets (i.e. stocks and/or real-estate holdings) … but, recognize that you ARE gambling-while-learning, so that you can get the higher returns that you crave.

OR

C. If B. is not for you – or it simply doesn’t work out for you when you are still only ‘gambling’ with small amounts, then it’s not for you at all! Quit while you are not too far behind and then refer to A.

That’s it! 🙂

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One thought on “Advice for a small investor …

  1. Investment education comes at a cost. Diversifying is the general advice given to all the investors, but you are right here in saying that if you diversify your investments, then expect to get ‘market returns’ or less.

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