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Best Ways to Begin Stock Investing

Posted by billspaced | 6:01 PM | , | 7 comments »

My blogging friend, AJC over at How to Make 7 Million in 7 Years talked about how a newcomer to stock investing should get started in this post -- What is the best way for a newcomer to get started in investing in stocks?

In the post, he suggests to use the 2 methods that Warren Buffett uses: Index funds or carefully-picked individual stocks.

There are many ways to answer this. For those of us with little time, index funds are the way to go. But for the savings you get in time, you may well pay for it (and then some!) in terms of lower returns. After all, if you picked 5-10 stocks, over a 10-year period, you might get a 20 percent return, whereas an index fund, like the S&P 500, might return 8-10 percent. With $10,000, that return differential means you left some serious money on the table (about $36,000).

If you spend an hour or two researching some really good stocks (start here), you can assemble a portfolio of stocks that most likely will beat the market (i.e., the S&P 500) over a ten-year period or longer.

But if you don't have the stomach or the inclination for it, invest in the market. At least you'll be average, rather than at 0-3 percent, depending on where you put your "savings."

I don't know the foreign markets like I should, but I've done very well investing in foreign mutual funds. In fact, I've had more than 50 percent of my 401k invested in foreign mutual funds for quite some time now. I simply think that the U.S. is only going to grow at a slow rate, if any at all. Surely, our economy won't grow as rapidly as the BRICs (Brazil, Russia, India, and China) in the long-term, probably not even in the short-term.

But because I don't know the individual companies that make up those markets, I simply buy their "market." It's somewhat akin to how we play sectors like telecomm and banking in our own market, but I've extended that strategy to the global market. If I were to take one step further, I might invest in the auto industry, for example, in India, or the waste management sector in China. Both industries are sure to grow by leaps and bounds.

So, the "best way" to begin stock investing is to begin by asking yourself these questions:

  • How much am I willing to risk (don't invest anything in stocks outside a retirement account that you're not willing to lose)?
  • How much homework do I want to do?
  • What is my tolerance for volatility?
If you're like most, you'll do well by investing in the S&P 500 and its global equivalents. You'll do better if you pick a few select stocks yourself (more on this in a future post). Even better still, if you have a really strong stomach and spare time or are contemplating a career change, you can invest in the business of YOU. Start your own business in a niche that others won't touch, like in Dirty Jobs.

Clearly, some of us don't have the stomach to invest in stocks or stock mutual funds. But it all comes down to how much risk are you willing to take for a given return? Answer that question with a long time horizon and stocks look better and better. Over the past 80 years or so, stocks have averaged far more than alternative investments; in fact, they've averaged above-inflation returns whereas bonds and savings accounts woefully underperformed and lost money when inflation was taken into account.

My opinion: Not investing in stocks is riskier than investing in them.

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7 comments

  1. Anonymous // 5/23/2008 9:14 PM  

    If you want an immediate 37% return on your money, then pay off your credit cards. Yes, it's that simple. Go forth and prosper.

  2. Andrew // 5/25/2008 1:45 PM  

    If you consider the tremendous amounts of money managed by large institutions whose job it is to spend 100 hour weeks watching the market and investing then I think it is somewhat misguided to believe that with only a few hours you could pick a stock that would outperform for the next decade.

  3. M Nazri // 5/27/2008 12:06 AM  

    Planning is the first step before we invest in any investment product. This step must be remembered.

    Thanks

  4. Bruner // 7/06/2008 9:54 AM  

    I personally believe that listening to an array of experts and making your own choices out of their choices is the best way to go.

    I use stockchase and have made close to 30% in the last 3 months.

  5. Dr Latib // 7/06/2008 1:38 PM  

    Who said Warren Buffet uses index funds? he has just bet against them and to Andrew, monkeys throwing darts at a board with company names outperformed the same managers who "watch the market 100 hours a week", dont diversify, focus, diversification is old news from your broker who wants to get rich off the commissions. Focus is what people like buffet do, find a good company, good management, visit them, understand their business and buy if it the stock is worth your valuation.

  6. Anonymous // 7/06/2008 2:06 PM  

    I'm 39, about to come into a large sum of cash of £600,000 (post reductions), and was looking into investing the entire amount into property (rentals, no mortgages). Do you feel that investing in stocks is a good/better option?

  7. billspaced // 7/08/2008 4:43 PM  

    @ dr latib:

    I think you're referring to me and my poor use of words: Buffett most likely doesn't use index funds and I said he did. I apologize for the suggestion.

    @ anonymous:

    One of the hallmarks of good investing is to put your eggs in a few different baskets, so that if one basket doesn't pan out, your other baskets can bail you out.

    (In short, diversify.)

    That said, I' suggest you put 1/3 into property, 1/3 into equities of some sort, and 1/3 into cash and bonds (equally weighted, or 1/6 in each). You'd then have an inflation hedge (the stocks), a cash flow machine (the real property), and a deflation hedge (the bonds), with some liquidity in the form of cash.

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