I recently sold off all my shares of another company that I invested in, leaving me with only one stock investment left (that I’m likely to sell soon, too). This stock I just sold performed poorly (I lost money) since a bought it a couple years ago, but that’s not even my principal reason for selling. In fact, I’m not jaded by my stock investing experience at all. I’ve had good luck (yes, I really do feel my other pick came down to luck, not skill), as my remaining stock investment has returned about 250% in the two years I’ve owned it.
My reason for selling is that stocks are not the best choice for the casual investor. I would consider anyone that’s not some sort of investing professional a “casual investor”. In fact, many of those that consider themselves seasoned investors should be looking to options other than stocks, too.
Why No Stocks?
First off, the idea of picking individual stocks turns people off to the idea of investing in the first place. People think all investing is complicated and only for the elite. Others think they need insider knowledge or to read magazines and other sources constantly to keep up with the changing markets. They also believe that you need to constantly manage a portfolio, making trades on a weekly or monthly basis. This simply isn’t the case.
Secondly, anyone that thinks they are going to consistently beat the market picking stocks is foolish. As Ramit points out in I Will Teach You To Be Rich, Warren Buffet, among the best of the best on investors, has returned about 22 percent annually on his investments for forty years. 22 percent is fairly modest to you and me, especially if you’re only investing a few thousand dollars each year. And, let’s not forget: You’re not Warren Buffet! Even greatest investors out there can’t expect a return that’s a hell of a lot higher than the market itself returns (which is about 10% per year, historically).
The Easy Alternative to Stocks
What’s the solution without stocks? Investing in mutual and index funds.
I personally like index funds because they have a much lower expense ratio than mutual funds typically do. Owning a mutual fund will typically cost 1.5-3% of your investment each year, while index funds often cost around 0.25% (my Fidelity Total Market Index Fund is 0.10%). This is because index funds are essentially run by a computer whereas mutual funds are run by a person (and that person wants to be paid!) While mutual founds may not sound expensive, that 1.5-3% eats into your earnings and can have large affects over long compounding periods. Besides expense ratios, many index funds outperform mutual funds anyway. Easy choice, right?
The returns you can expect on index funds are essentially the same as how the market performs: about 10%, annually . I know that no one’s stock market fantasy involves an 10% return, but expecting more than that is incredibly unrealistic when considering what the pros return on their investments.
If You Still Want to Buy Stocks
If you really want to buy stocks (I know several people that love the idea of owning a piece of Apple), keep it to a small portion of your total investment portfolio. I try to keep individual stocks around 5% of my total portfolio. Given the volatility and difficulty of trading stocks, it gives me the opportunity to have some fun taking a shot on stocks, but doesn’t risk my retirement savings at the same time.
The important part of investing is to get started right away. You need to do so to take advantage of compounding returns that will grow your money the longer you have it invested. Now that you know that you can’t expect 1,000% returns on your investments (even if you are Warren Buffet), that means you have to make up for it by getting time on your side.
If you’re unsure where to start, I recommend checking out I Will Teach You To Be Rich or Your Money: The Missing Manual for an introduction to index funds. If you still need help, you can work with a financial planner to invest in index funds and give up the hassle and complication of dealing with stocks.
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