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You Might Not Invest Well, But Do It Anyway

26 May 2011 9 Comments

Investing is hard.  Don’t listen to what the financial experts will tell you, most of you probably won’t make much money as an investor.  The reality is that by the time you hear of a good stock, you’re probably too late.  And, if you choose to do the passive route, your return isn’t likely to be huge anyways when you factor in inflation since you’re essentially buying fully valued stocks continually.

You see the market can be exploited and you can do very well if you take a ton of time to invest and study various companies, but most of you won’t do that.  Even if you’re buying quality dividend stocks that will grow over time, the market is somewhat efficient and these future cash flows are priced into your purchase price.

The key is to buy great companies when nobody wants them.  They’re hard to find because frankly, there’s a reason they are depressed.  Here’s a hint of a possible company in this category: Microsoft (MSFT).

So even if you’re return is only a few percentage points every year for the next couple decades, I still think you should invest.  More than anything, you are proactively saving which most people don’t do.  Maybe you’ll get lucky and get a few extra points of return on your money and at least make it worth you while.  But, even if you don’t, you’re still saving money and putting it away to at least hopefully keep up with inflation.

Don’t try and hit a home run, because when you do, you’ll probably lose half your money.  Instead, stick to your game plan, don’t worry if you can’t find the next Apple, and be satisfied with at least keeping your purchasing power.  You’ll be fine down the road.

9 Comments »

  • @MoneyIn20s said:

    I agree with you, though I'm more optimistic, especially when investing for retirement. I think the odds that stocks will be valued at a higher level than today in 40 years when I retire are pretty good.

    I've heard a lot of talk about Microsoft being the value play of today but I'm not sure I agree. With the increasing trend of applications and operating systems moving to the cloud (Chromebooks, Jolicloud) I think Microsoft's market share and dominance could be very vulnerable.

    On the other hand I think Apple still has significant upside potential at a reasonable valuation. While Apple has seen a great run in the past few years, its shares have gotten hit recently and I think it's undervalued relative to its growth prospects and cash pile.

  • NoDebtMBA.com said:

    When I first started my IRA I had no idea what I wanted to invest in. I'm really glad that I went ahead and put my money in there any way, simply selecting a targeted date fund, because the cost of NOT investing and being guaranteed returns of less than a percent in a savings account is so high.

  • Arthur Garcia said:

    I just finished a the Book, "a random walk down wallstreet" and essentially the main point of the book is that buy and selling stocks is almost impossible way to create a consistent return. The author instead encourages the readers to passively invest in Index funds.

    Do you see that as a viable strategy? I don't really have any money in the market, as I prefer dumping it into real estate, but I have considered taking the index approach as a way to diversify myself.

    The thing that has made me hesitant is low returns these types of investments yield. just curious to get your thoughts or other 20smoney readers thoughts on the book and strategy…looking forward to reading the responses…

  • @MoneyIn20s said:

    I haven't read "a random walk down wall street" but have read other books that present a strong case for index investing. Index investing is a good way to build a low-cost, diversified portfolio that can have solid potential long-term returns.

    Here's the main reasons I like passive investing to build the core of a portfolio vs using actively managed funds:
    1. Only a small percentage of actively managed funds beat their index over the long term.
    2. Past performance in actively managed funds is not necessarily consistent with future performance.
    3. Actively managed funds typically have significantly higher costs.
    To outperform index funds your manager has to pick the right investments, you have to pick the right managers (since most won't outperform in the long run), and they have to outperform enough to offset their higher fees. Given the points above you can see how this would be challenging.

    While I don't use actively managed funds I do allocate a smaller percentage of my portfolio to individual stocks or sectors I see opportunity in. I'm more comfortable identifying these opportunities than trying to identifying a good active fund manager. This helps increase my potential long-term returns without lowering the risk of being wiped out by investing only in individual stocks or sectors.

  • Mike said:

    Arthur,

    The drumbeat about the advantages of index investing is very common. The idea behind it is sound, but when you invest for a while (I've been in the market for about 15 years), I've learned that it's only one way to invest. The approach I've taken is to look at investments as if they were businesses. From a business point of view, you want to know about cash flow, economic strength, and market competitiveness.

    It's not unlike how you would invest in real estate. You probably invest in real estate for cash flow, not the expectation of huge capital gains (of course that can happen if you buy good properties). So, you can find stock investments that are good businesses with great cash flow and most importantly dividends. This strategy is not about 'beating the market' it's about buying attractive stocks with a realistic view of how you will make money and what your returns could possibly be. This is easiest with the highest quality companies with established records.

    This strategy is easiest if you are a stock picker. If you still want to be a passive investor, you can buy the Dividend Aristocrats ETF (SPY), which is a high quality list of dividend companies (current yield: 3%). There are many other ideas and investments out there if you take the time to learn about them. There are many ETFs and funds that offer higher yields because they focus on a specific strategy (like the aristocrats), and yes many of these are based upon indexes.

    Mike

  • Anon said:

    Just had to point this out.. I believe Dividend Aristocrats ETF is SDY.

  • Arup said:

    yes agree with this article, investing is hard but it is the thing you should not run away from. It is your hard earned money completely depending on others can be a crime. Its alright if you depend on certain person for investment but dont do it for all of your investment money. Invest on your own as it will help you to save for your retirement.
    Another great point in the article was that do not be greedy try to aim realistically. Remember it is always better to make small profit compared to a loss.

  • Christina Carabini said:

    ……Posted by in ……………Be careful that bankrupt businesses dont take your money down with them. You could lose a warranty 401 k contributions a safe-deposit box or even your car…

  • Panama foundation said:

    Think of it as a prepay Visa card…Just top it up with your money and use it anywhere you see the Visa sign. Pop in to your local O2 store and pick up your card to start saving today….. You will need to top up your card when you buy it any amount between 20 – 150.