One of the best pieces of stock market advice I ever received was from a man on his deathbed. This man was a former real-estate investor and at the time he was a patient of mine in the intensive care unit:
Picking individual stocks is for fools!
I was 22 years old at the time and although I had done a fine job investing for my age group, this man had spent his entire life investing. He found a very successful recipe for himself in which he shared with me.
He asked me if I had ever heard of John Bogle, to which I replied, “yes.”
I had heard of John Bogle. I knew that Bogle was the founder and former CEO of Vanguard Group, a massive investment management firm, but I never studied any of his works.
He told me to read “The Little Book of Common Sense Investing,” and that this book would change my perspective on the market. This was the first time I had been exposed to the “Boglehead” ideology – a term for individuals who stick true to the teachings of John Bogle. He said that many individuals believe they can beat the market by picking their own stocks, however for the average individual, investing in stocks is for fools.
So if picking stocks is for fools, what should I invest in?
Let me introduce you to the index fund. An index fund is a group of stocks that you can buy as a bundle. By purchasing an index fund, you will own a whole group of stocks. This will protect yourself from some of the risk of picking the wrong stocks. In that index fund, some stocks will go up and some will go down. However, as Bogle has pointed out in his books, the stock market as a whole has always gone up over the long term. This means that if your portfolio (investments) reflects the broader stock market, your investment will grow over a long period of time even as some individual stocks go down.
How Do You Invest in the Entire Stock Market?
You don’t need to be a millionaire to own the entire stock market. By buying index funds that reflect the S&P 500 (which includes 500 of the largest companies on the stock exchanges), your investments (tax favored or taxable) will track the performance of the greater stock market!
This may sound too simplistic and perhaps a bit boring, but it’s not. Regardless of your investing knowledge or perceived skill level, it is extremely important to have at least a portion of your money in index funds. Why? PROTECTION.
Nobody likes to concede to the fact that their hard earned money will achieve solely a market average return, however many individuals lack the temperament and skill to consistently pick winning stocks.
Aside from the fact that stock picking can be difficult, there is also a time factor that comes into play when researching and managing your own money. Many individuals simply do not want to spend their weekends or time off actively researching holdings or potential holdings. This is yet another reason why index funds are important.
But the Stock Market Doesn’t Always Go Up!
You’re right. There are good times (bull markets) and bad times (bear markets). The S&P 500 index fund not only guarantees you the profits made by the stock market, but the losses, too. In fact, the market cycles through periods of growth and decline.
We are probably due for another bear market as the last one was during the 2008 recession. Don’t freak out and sell everything when it happens. We expect it to happen. Just remember that over a long period of time (say your investment lifetime) the stock market has always grown and things should pick up. Just stick to your investing plan and have confidence that good times are ahead.
You’ll never be able to time the market perfectly, so the best advice is to invest regularly regardless of whether you think we are at the peak or the nadir (all-time low).
Where Should I Invest My Money?
Like I mentioned earlier, a portion (at least your first $10,000) should be invested into index funds, and should be contributed to bi-weekly or monthly (most workplaces offer this plan). Doing so will provide you a stable foundation for your investments and somewhat of a security blanket in case some of your higher risk investments don’t pan out as planned.
Where should you invest the remainder of your money? Well, this is highly dependent on your age, level of investing knowledge, and overall comfort level. There is no right or wrong asset class to invest in, whether it’s stocks, real estate, collectables and antiques, invest using your strengths.
I personally like researching and analyzing stocks, I find it highly enjoyable. A set portion of my portfolio is allocated into index funds, so I am well protected, however I am not a full blown Boglehead. I firmly believe in taking calculated risks and investing into high quality companies.
I manage a portfolio of stocks with a team and write a monthly newsletter summarizing our holdings and potential acquisitions. Our return in 2017 was 37%, and thus far in 2018 while the S&P 500 is down 0.76% our return has been 6%. It’s a great place to get started!