One thing that I’ve been doing is trying to learn more about stocks. I have a friend of mine who damn near seems like Warren Buffet. He learned his skills from a family member and has shown me some amazing stocks. I’m not someone who just wants the latest stock “tip”, rather, I’d prefer to understand how to find the stock myself. So, over a few lunches, my friend has been showing me a few things. I’ve only forgotten about half of what he has said to me, but I guess that repetition will help.
So, picking stocks isn’t easy. Over time I will perfect my skills and then be a plain old mediocre investor like most everyone else. You know what’s going to make me different though? The zoo. I’m going to go to the zoo once a month and hold up large “flash cards” with stock symbols on them. Whichever card the monkey points out first will be the stock I buy. I know, I know. It’s brilliant. I may have to look in to a zoo pass though because monthly admission on top of the fees I’ll have to pay to trade the stocks will really start to add up.
Mutual funds seem like they’d be so much easier. The only problem with mutual funds is a WHOLE BUNCH of them suck. Their expenses are high and their returns are TERRIBLE. I have taken the approach of just buying index funds. It seemed easy enough. But, you know what? That isn’t so easy either. It turns out that some index funds are performing far better than others. Take the S&P 500. I have been investing in that for the last couple of years. Too much as a matter of fact because the returns on the S&P haven’t been that good. A few months ago I moved some money over to an international index and a Russell 2000 small cap index. Guess what. They are kicking some gluteus maximus. (Yes, I spelled that correctly without a spell checker) :) Anyway, I’ve learned a couple good lessons. I feel a lot better about my portfolio now and have even gone so far as to purchase a value investing fund that has very low expenses and has had a strong return year over year. Long term I think these choices will pay off.
What’s your method for choosing funds?
Checking the long-term performance of the fund is a good way of judging it. However, when I choose a fund I look at the individual stocks they invest in, how much of each they have, and look into the individual performance of most of the individual companies.
I’m not a huge fan of mutual funds or index stocks though.
Your method of choosing funds (i.e., buying a single index), and the commenter’s method (i.e., looking at long run performance), are both terribly problematic. If you dont understand asset allocation and rebalancing, you should learn this quickly. I recommend you check out this article: http://www.fundadvice.com/articles/buy-hold/the-ultimate-buy-and-hold-strategy.html by Paul Merriman. After you’ve finished it, you should buy the Four Pillars of Investing by William Bernstein, and after you finish that book, you should read the Intelligent Asset Allocater (also by Bernstein), and All About Asset Allocation by Richard Ferri. There is a lot more to passive index investing than you seem to be aware of. Trust me: buy these books.
You should re-evaluate your take on mutual funds. There are some great mutual funds out there that destroy index funds. American Funds has a couple growth stock funds that are killer. I do not know what your goals are, but you need to be looking at the long term returns if you are investing in the market, or you’ll get burned every time.
Thanks Todd!!!
Hazzard
Thanks for the advice Miserly. I’ll check them out!
Hazzard
Here is a link for a periodic table of investment returns. Check out how the different indexes and sub-indexes perform from year to year. Might give you some insight into allocation.
We’re more focused on paying off debt than investing right now but a big part of our retirement savings is in Vanguard’s Target Retirement funds. As I understand it, Target Retirement funds are a relatively new phenomenon in which the mutual fund company selects several of their mutual funds and puts them into one, with the allocation based on your projected retirement date. It’s sort of one stop shopping for retirement funds and you don’t have to worry about rebalancing since the company is doing that for you.
Because we are baby investors without huge amounts invested, I’m not overly concerned with our returns YET, but I do try to keep an eye on them. I had also become aware that a criticism of Vanguard’s Target funds were that they were too conservative. Just today we received a letter from Vanguard informing us that the mix was being change with more of an emphasis on equities…thus less conservative.
I understand that most conventional advice would recommend mutual funds or ETFs. For myself I have spent considerable time (thousands of hours) researching long-term investing and not just in standard books available at Borders. My portfolio of stocks, commodities and cash markets is averaging 40% annual ROI (over the past 5 years) with a maximum DD of no more than 15%. I have studied data from the past 40 years and have a statistically relevant methodology for entering and exiting markets combined with efficient money management.
That being said my mom (and plenty of other conventional investors) still believe that investing with a Vanguard mutual fund would be better. Just remember that most conventional investors subscribe to a buy and hold philosophy (which has worked well for the past 15 years but terribly over the past 100 years) and use poor or no money management. Also their returns rarely exceed 15% and usually average about 8% in the long run.
If you are young (i.e. not over 45) I would strongly suggest putting more effort into researching your investments. It’s clear to me that you spend a lot of thought and effort saving your money and it would serve you well to consider your investments wisely. Many people believe that they are investing with a low risk fund only to find out too late that it is high risk. A good example of this is my mom who was making about 15% ROI in her mutual funds until 2001-2002 when she suffered a maximum drawdown of nearly 60%. Make sure you know you’re real risk. Do your research and don’t believe what the masses tell you about investing. After all look at how well the average person saves.
Great advice Edward. Thanks for sharing your thoughts. I’m trying hard to learn how to conservatively value a company to look for potential opportunities in the market. A friend of mine has been helping me and I’ve learned a ton so far. As I build a bit more confidence I plan to start testing my analysis with real stocks. (and branch out from mutual funds)