7/16/2014 8:15 PM ET|
The secret to investing on your own
Investing isn't a game of buying low and selling high, and you don't need to pay anyone to do it for you. It's about owning companies, and taking a risk to do so.
Recently, the editors at Money.com asked me to think about what it takes to become an independent investor.
I'll take "independent" to mean something that most people with a 401k or an individual retirement account can realistically do. I'm not talking about sitting at your desk all day trading your own portfolio of stocks.
In fact, the way I think about independence, you'll want to automate about 99 percent of the investment decisions in your portfolio -- specifically, which individual stocks and bonds to hold.
The independence that matters has nothing to do with stock selection. It's about cutting out costly middlemen, from advisers who help you select investments, to the managers who pick the securities inside the mutual funds you may hold.
The rewards to doing this are significant. A high-cost mutual fund may shave 1 percent or more off of your investments each year, which can easily add up to six figures in fees and foregone gains over a lifetime as an investor. Eliminating layers of management also means you are less exposed to the quirky risks someone else might take with your money.
You don't need a lot of time or expertise to pick these middleman-free investments. You can build a portfolio that holds a diversified slice of stocks and bonds with just three index mutual funds, portfolios that mimic the composition of the overall market at very low cost. If stocks rise 8 percent in a year, you'll earn 8 percent or very close to it. You very likely have index options in your 401k plan -- if not, say something to your HR manager! -- and index funds are easy to buy in an IRA.
Below is what that portfolio might look like. You can adjust the split depending on your appetite for risk, but the one below is a good starting point for many long-term investors saving for retirement. (The less you can stand to lose, the more you'd add to the bond fund.)
In contrast to typical funds, this portfolio will cost you less than 0.1 percent of assets per year, and will get with three easy decisions exposure to literally thousands of stocks. You can choose index funds from our Money 50 list of recommended funds.
It's easy to say that anyone can do this, of course. But I think a lot of people lean on investment middlemen because they aren't sure they know enough about investing to do it themselves, and even if they want to learn, they aren't sure which knowledge really matters. There's so much you could dive into: stock sectors, "P/E" ratios, the January effect, EPS growth, upside earnings surprises, etc., and etc.
So here's the one thing I think you have to understand to be a competent, on-your-own investor: Where the return on your investments really comes from. And the answer is that, for stocks, it comes from two sources. You own businesses, and you are taking a risk to do so.
Beginners are often introduced to the market with the old saying, "buy low and sell high." This isn't wrong (doing it the other way sure won't feel good), but it's not at all helpful. It makes investing sound a like a game of wits against other investors -- first you figure out when a stock is too low, and then sell it when somebody else is willing to buy it for more than its worth.
That's hard, and you have to learn a lot about companies, accounting and human psychology to even attempt it. The whole edifice of the middleman money management business is built on the fact that most people believe they can't do this themselves, or don't want to.
But to be a buy-and-hold index investor, you can throw out "buy low/sell high" and the game-playing thinking that tends to go with it. This isn't about finding a greater fool to buy your stock further down the road.
Owning stocks gives you a claim on the earnings of companies. As an owner, you make money over time either because you are being paid a dividend out of profits, or because profits are being reinvested in the business to make it more valuable. Index funds give you a share in the future profits of the America's, or the world's, public companies. It's almost as simple as that. Almost.
The other, crucial part of the equation is that the earnings of companies are uncertain and so are the cash flows shareholders will get. Stock investors get no promises that a company will ever earn enough to produce a dividend. Investors typically bake that risk into the market price of stocks, so that they can hope to be compensated with a higher return than they'd get on bonds.
Historically, stocks have earned about 4.5 percentage points per year above bonds. Stock investors have on average been paid for risk -- but that doesn't mean you'll always get paid for risk. Case in point: The nearly 50 percent loss investors took on blue-chip stocks in the wake of the financial crisis.
If you get that, you have the baseline knowledge you need to build a diversified portfolio and stick with it. The potential for loss is built into stock investing and you only make money if you are willing to live with that. The rest is (usually expensive) fiddling around the edges.
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VIDEO ON MSN MONEY
When Microsoft fires 18,000 workers today, does this mean we've finally reached the summer of "recovery" ???
Rome burns while Papa Doc fiddles ?
Nope, at least that would be doing SOMETHING
We get yet ANOTHER vacation - this time for 2 straight weeks in a row
IMPEACH THIS FRAUD AFTER TAKING THE SENATE IN NOV
BTW, did Grandma Moocher go on this vacation too , on our dime AGAIN too ???
Remember when Papa Doc proclaimed himself the 4th best President in history ?
Hello - actually the PEOPLE ranked you as the worst in modern times !
Even WAY below that evil, white, devil GW Bush !!!
Investing in equities can prove profitable by multiple routes. The author's is one route; buy-low-sell-high is another one. Neither strategy is necessarily profitable. Depending on when you desire (or must) sell, the risk you assumed will then and only then produce a gain or loss.
OBAMA AG CRIES RACISM (SURPRISE )
Have you heard the one about the black attorney general who sits down with a black reporter from ABC News to talk about America’s first black president? “Sure is a lot of racism,” says the AG. Rim shot.
Yeah, not a very funny joke. But that’s the point — it’s not a joke. It actually happened last week.
Eric H. Holder Jr., the first black man ever to hold the post of attorney general, sat down with senior Justice Department reporter Pierre Thomas for an interview.
“There’s a certain level of vehemence, it seems to me, that’s directed at me [and] directed at the president,” he said. “You know, people talking about taking their country back. I can’t look into peoples’ hearts, look into peoples’ minds, but it seems to me that this president has been treated differently than others There’s a certain racial component to this for some people.”
What is funnier than the opening joke is the fact that Mr. Holder really believes this. To him, it’s impossible for Americans to oppose President Obama, to object to his policies and his actions simply on the basis of politics. No, those opponents who want to talk about “taking their country back” simply must be racist.
BTW, I've heard Billy Bob Clinton, Hillary Benghazi Clinton, Harry Reid, Kerry
ALL decry that they wanted to take the country "back"
See, it's racism ONLY if a conservative or a republican say it !
How desperate can these tools in the WH be to deflect ALL those scandals , screw ups , bad economy and flooding of illegals into our once great country ?
That's all the have left - the dreaded , feared , nuclear weapon of the left - the "R" word
Vote the commie bums out in NOV
Impeach the fraud in Dec !
I'd take a dead Bush, the Bush dog, a retarded Bush over this empty suit , bozo, fraud , liar and loser in the WH And surprise, cretin -----
So would MOST Americans
Did you forget who was voted the WORST PRESEDNT IN MODERN TIMES , A$$WIPE ????
It's none other than
Barrack Hussein Barry Soetoro Harrison J Bournel Obuma !
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