How to invest your money yourself, cheaper, better, and with less angst
If you're fortunate enough to have some money to put aside, it can be a blessing and a curse. What do you do with it? I have nothing to sell you. I'm only offering to tell you what I have learned over 40 years of investing.
- •I have a degree in economics and was a licensed broker for a Wall Street firm (but only briefly; I turned out to be a terrible salesman). I've spent my career working in another industry, but I have had a lifelong interest in investing. I've done a lot of reading on the subject, & have tried a variety of approaches.
- •First, a disclaimer...This list presents some general ideas and gives you references for further detail. All investing involves risk. Make the decisions that are best for your particular situation.
- •First, some background. Picking individual stocks is a very difficult way to go.Yes, people who held Apple stock (for example) have done very well. But there were long periods when Apple's stock went down or stayed flat. Investors in Enron thought the company was transformative (until it suddenly collapsed). To do well as a stock picker you have to pick the right company in the right industry at the right time. And you have to do this repeatedly, since no one should hold only one stock. And you have to continuously monitor all the stocks you own. Fun? No, not really.
- •You could pay a broker to do this for you.But they often charge high fees, and their track record over time isn't better than that of the market as a whole (more on that below). Any particular broker will do better than the overall market sometimes, and worse other times. The only broker who claimed never to lose money was Bernie Madoff. (You probably heard how that turned out.)
- •You could buy mutual funds, where the fund manager pools your money with other people's and does the stock picking.But you have to pick a fund that does well during your investing time frame (the next 5, 10, or even 30 years, depending on your situation). So you're still in a position of trying to predict the future. Also, today's "hot" funds often do poorly a year or two from now. None of them outperform indefinitely.
- •But some people consistently beat the market, right? What about Warren Buffet?Yes, Buffet did do extremely well for many years. But he was very unusual. And today we're living in a time when very sophisticated people are studying the markets constantly to try to gain a slight advantage over the other guy, and when high speed computer trading is responsible for most of the activity in the market. Don't look for another Warren Buffet story--I'm not sure we'll see it again.
- •Does this sound like a hopeless situation?It isn't. Over the last years, the S&P 500 has gone up an average of 7% a year. Some years it goes up a lot more. Some years it goes down, sometimes by a lot. But if you hold an investment in the stock market as a whole over a long period, history shows you will do well. Statistically speaking, the longer you hold such an investment, the more likely this is to be true.
- •How do you buy the "whole stock market?" By buying an exchange traded stock index fund (known as an ETF).ETFs trade like stocks and generally have low fees. Thru a brokerage account, you can buy them for a nominal commission and often can reinvest the dividends. The term "index funds" means they are not actively managed; that is, no one is guessing which individual stocks will be the best performers next year. The fund administrator is literally buying all of the stocks in the index (such as the S&P 500). With every ETF share you buy, you're buying the entire index. That's diversification!
- •You ideally should have a US stock ETF, and an international stock ETF.This is because when international stocks have a bad year US stocks often do well, and vice versa. This is a way to further reduce your risk.
- •As part of this process, identify and maintain a particular asset allocation you are comfortable with.You may decide the right allocation for you is 40% US stock ETF, 30% international stock ETF, and 30% cash (such as CDs or bonds). Then, once a year or so you look at your investment account and rebalance it. (This is another safety mechanism--if US stocks have had a great year, they will come to represent more than 40% of your investments. By moving some of those gains to your cash and international investments, you avoid being overinvested in that sector when the next market correction comes.)
- •This system takes the guesswork out of the process, as well as the fear that you've made a bad or unlucky decision.You've bought the overall market, and history has shown that over time that's a smart investment. You'll find that you worry less about your money. You only have to think about this once a year when you rebalance. Nice.
- •For further research—Several writers go into more depth on this, including making specific ETF recommendations. I liked a book called How a Second Grader Beats Wall Street, by Allan Roth. The Oblivious Investor blog also has a lot of information on this type of investing.
- •11. I wish you good luck, and no money worries!