Best Ways to Begin Stock Investing

My blogging friend, AJC over at How to Make 7 Million in 7 Years talked about how a newcomer to stock investing should get started in this post — What is the best way for a newcomer to get started in investing in stocks? In the post, he suggests to use the 2 methods that Warren Buffett uses: Index funds or carefully-picked individual stocks.

There are many ways to answer this. For those of us with little time, index funds are the way to go. But for the savings you get in time, you may well pay for it (and then some!) in terms of lower returns. After all, if you picked 5-10 stocks, over a 10-year period, you might get a 20 percent return, whereas an index fund, like the S&P 500, might return 8-10 percent.

With $10,000, that return differential means you left some serious money on the table (about $36,000). If you spend an hour or two researching some really good stocks (start here), you can assemble a portfolio of stocks that most likely will beat the market (i.e., the S&P 500) over a ten-year period or longer. But if you don't have the stomach or the inclination for it, invest in the market.

At least you'll be average, rather than at 0-3 percent, depending on where you put your "savings." I don't know the foreign markets like I should, but I've done very well investing in foreign mutual funds. In fact, I've had more than 50 percent of my 401k invested in foreign mutual funds for quite some time now. I simply think that the U.S. is only going to grow at a slow rate, if any at all. Surely, our economy won't grow as rapidly as the BRICs (Brazil, Russia, India, and China) in the long-term, probably not even in the short-term.

But because I don't know the individual companies that make up those markets, I simply buy their "market." It's somewhat akin to how we play sectors like telecomm and banking in our own market, but I've extended that strategy to the global market. If I were to take one step further, I might invest in the auto industry, for example, in India, or the waste management sector in China. Both industries are sure to grow by leaps and bounds. So, the "best way" to begin stock investing is to begin by asking yourself these questions:

  • How much am I willing to risk (don't invest anything in stocks outside a retirement account that you're not willing to lose)?
  • How much homework do I want to do?
  • What is my tolerance for volatility?

If you're like most, you'll do well by investing in the S&P 500 and its global equivalents. You'll do better if you pick a few select stocks yourself (more on this in a future post). Even better still, if you have a really strong stomach and spare time or are contemplating a career change, you can invest in the business of YOU. Start your own business in a niche that others won't touch, like in Dirty Jobs. Clearly, some of us don't have the stomach to invest in stocks or stock mutual funds. But it all comes down to how much risk are you willing to take for a given return? Answer that question with a long time horizon and stocks look better and better. Over the past 80 years or so, stocks have averaged far more than alternative investments; in fact, they've averaged above-inflation returns whereas bonds and savings accounts woefully underperformed and lost money when inflation was taken into account. My opinion: Not investing in stocks is riskier than investing in them.

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billspaced

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Anonymous - May 24, 2008 Reply

If you want an immediate 37% return on your money, then pay off your credit cards. Yes, it’s that simple. Go forth and prosper.

Andrew - May 25, 2008 Reply

If you consider the tremendous amounts of money managed by large institutions whose job it is to spend 100 hour weeks watching the market and investing then I think it is somewhat misguided to believe that with only a few hours you could pick a stock that would outperform for the next decade.

M Nazri - May 27, 2008 Reply

Planning is the first step before we invest in any investment product. This step must be remembered.

Thanks

Bruner - July 6, 2008 Reply

I personally believe that listening to an array of experts and making your own choices out of their choices is the best way to go.

I use stockchase and have made close to 30% in the last 3 months.

Dr Latib - July 6, 2008 Reply

Who said Warren Buffet uses index funds? he has just bet against them and to Andrew, monkeys throwing darts at a board with company names outperformed the same managers who “watch the market 100 hours a week”, dont diversify, focus, diversification is old news from your broker who wants to get rich off the commissions. Focus is what people like buffet do, find a good company, good management, visit them, understand their business and buy if it the stock is worth your valuation.

Anonymous - July 6, 2008 Reply

I’m 39, about to come into a large sum of cash of £600,000 (post reductions), and was looking into investing the entire amount into property (rentals, no mortgages). Do you feel that investing in stocks is a good/better option?

billspaced - July 8, 2008 Reply

@ dr latib:

I think you’re referring to me and my poor use of words: Buffett most likely doesn’t use index funds and I said he did. I apologize for the suggestion.

@ anonymous:

One of the hallmarks of good investing is to put your eggs in a few different baskets, so that if one basket doesn’t pan out, your other baskets can bail you out.

(In short, diversify.)

That said, I’ suggest you put 1/3 into property, 1/3 into equities of some sort, and 1/3 into cash and bonds (equally weighted, or 1/6 in each). You’d then have an inflation hedge (the stocks), a cash flow machine (the real property), and a deflation hedge (the bonds), with some liquidity in the form of cash.

Michael - June 24, 2009 Reply

Very good article.

In my opinion, it is all a matter of market timing. It does not matter if it is gold, oil, or Microsoft, if you have access to good market timing signals, they will help you get in and out at a profit.

No guarantees in this business, but if they are right most of the time, you can still make $s.

There are may web sites providing them out there (search Google). Just find one that works and use it! Check out http://invetrics.com as an example.

Its Dow Jones timing signals are up 44.7% as of 6/24/09 while the Dow is up just 26% off its March lows.

Following a market timing system works!

mlgreen8753 - September 8, 2009 Reply

I purchased my first stock after reading an article on a site called Breast Cancer Investing, which informed me about a company called Mentor Capital that has a 20% claim in a privately held biotech company called Quantum Immunologics (QI) who has FDA approved clinical on the way for a new breast cancer treatment that exposes proteins found only on cancer infected cells. By exposing these proteins, they can direct the immune system to directly attack only infected cells making this treatment safer and less tormenting than other forms of treatment. Because Mentor Capital is the primary funding source of (QI), an investment in the stock of Mentor Capital is supporting the breast cancer research of QI. Recognizing the potential of this innovative new treatment, I decided Mentor Capital stock would be a smart investment.

ANKARA WEB TASARIM - October 2, 2009 Reply

good source 😉

Arohan - October 2, 2009 Reply

Most institutional investors are so afraid of underperforming the indexes that they typically end up trying to mimicing the index or at the least buy the same stocks that everyone else thinks is a good idea.

Result: Most institutional investors and mutual funds underperform the index or deliver average returns.

On the other hand, running a concentrated portfolio with well chosen stocks will go a long way towards meeting your financial goals. If good returns are what you are after for your money, you have got to spend time researching good stocks.

Raag Vamdatt - India based financial planner - October 7, 2009 Reply

Hi,

A very well written post….

Can’t stress more on the point about investing in foreign market. Economies of emerging markets like India (where I operate) have a far higher growth rate than developed economies like US. This also gets reflected (and would continue to get reflected for years) in their stock markets.

So, if you are serious about investing in stocks, do consider to invest at least a small portion (maybe 10-15%) in emerging markets.

This would also be a good diversification strategy – both in terms of asset classes, and currency!!

Victor - December 12, 2009 Reply

Thank you for this post! I am still beginner and you helped me to understand better Stock Investing!
I am looking forward to read more your posts!

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