Monday, February 28, 2011
A useful round-up of things to know before the stock market opens this morning. You know, if you trade, which I do not. I do buy individual stocks, but I hold them essentially forever. I have shares that I bought with summer job money almost 30 years ago. When I was 23 I bought a small amount of Exxon and put it in the dividend reinvestment plan. You'd be amazed at what it is worth today, 26 years later.
If you are a young person, buy a few shares in really well run companies in different industries -- as long as oil is among them -- and hold them as long as possible unless something about the company changes fundamentally. You will not regret it when you are my age.
Oh. And mutual funds are only useful for specialized investments you would not make on your own, such as foreign stocks, or a portfolio of industry-specific stocks. Just accumulate shares in a few really good companies, only sell if the company or the world really changes in a big way, and you will be just fine. You have no money to invest? Nonsense. Virtually all of you are spending money you ought to be saving, or at least could save if you wanted, on ephemera.
Less hectoring blogging will resume shortly.
I can't agree with the dissing of mutual funds for the typical investor starting out. The trick is finding "really good, well run companies" for the small investor's initial nest egg. Too much concentration of risk, especially in a world where really good companies can turn very ugly very quickly, and rookie investors can't make appropriate judgments.
Start out in an index fund, then throw a few dollars into individual stocks. Better to sacrifice a little compounded growth than to see your initial investment drop like a stone.
First, let me say how much I enjoy your blog.
Second, you make good points in this post.
However, I would be concerned about the ability of young investors to find "a few really good companies". Without the time or expertise to determine the best long-term companies - and top analysts and their recommendations change yearly - it might be better to just match the market through ETFs and index funds.
The focus should be diversity, cost minimization, liquidity, etc. Young investors should take a long-term hold strategy as you suggest and adjust their holdings only as their personal circumstances materially change.
For more personal investing thoughts, please visit www.personalwm.com.
Before posting my advice, a disclosure. Way back in High School in an investment game class, I managed to take $100k of pseudo-money and turn it into $50k in a month. (which is why my wife runs our checkbook now)
TH has a good point. When you're young and inexperienced, you can certainly dig up a few hundred bucks that you were just going to blow on stupid stuff, and put it into a few good non-risky stocks. If it blows up, big whoop. You're young. You will make more.
But for retirement? Heck no. My 401K is in a good wide very low-load mutual fund. The higest risk I have is if the Obama administration decides it needs to be stripped "for my own good." And there are at least three ways they can try to do that.
I assume you're pricing your stock in USD...try re-pricing in gold or most any other currency and you'll be less sanguine about the outcome. Of course, nobody knows what the next 30 years are going to look like.