About 80% of my portfolio is index funds. Another 10% is bond funds. About 5% is in shares of Berkshire-Hathaway, and the remaining 5% (fun money) is spread out over several companies that I like (Budweiser, New York Times, and a few others). But don’t take that to mean that I think I’m going to do better with those individual picks than in my index funds.
It’s pretty well established that about 2/3rds of all actively managed mutual funds underperform the index WHEN YOU FIGURE IN THE FEES.
Further, trying to pick – IN ADVANCE – the 1/3 of funds that will beat the index in the future is impossible.
Keep in mind, OP, that plenty of rich families (The Du Ponts, e.g.) are probably just getting paid dividends from the companies they founded. The same dividends you get if you buy the stock, only they’re getting a much larger share.
Get back to me in 30 years, then we’ll have better information about how right your something is.
Buffet: “It’s only when the tide goes out that you learn who’s been swimming naked.” (possibly apocryphal)
Note that the rich do lose money, but only lose money they can afford to lose. If you have millions in index funds with a steady increase, then you can afford to put a few thousand in a risky venture that may not pan out.
I agree with almost all of the above but I believe that mutual funds are mostly bunk as well. I own some through my 401K like lots of people but I would never do it in investing where I had better choices. Mutual funds have some of the flaws as active personal training mentioned above and they charge you for the priviledge of making these fallacies for you. The reason they get away with it is that they generally do make people some money. It just happens to be less than a passively managed index funds that does very little would make. Most of the whole industry is a sham based on flawed principles that are very similar to the problems mentioned in other strategies above. For any normal mutual fund, it will be beat by index funds that mimic it and just sits there like a lump on a log. Index funds don’t pay for fancy NYC suites and hot shot MBA’s however so the people involved son’t puch them much.
The point about monthly investment is important. The technique known as “dollar-cost averaging” involves putting a set amount each month into a fund. When the fund price drops, you buy more shares and thus insulate yourself somewhat from short-term drops. Additionally, it’s a good habit to be putting away a set amount each month.
As for me, I have a few “pet” stocks which I have based purely on my own experience of interacting with the company; that is, as a layman they seem to be well-run and providing a good service. Amazon and Mothercare are two examples. But this is mostly for fun. The vast majority of my holdings are in index funds or actively managed funds with low charges.
One final tip is to use fund supermarkets such as Fidelity FundsNetwork rather than going directly to the fund managers. This will often provide a substantial discount in fees.
Put as much as possible of your paycheck into your companies 401K. The company match is going to be the greatest return on your investment you will ever see. If they match 50 cents on the dollar thats an instant 50% return. No stock or mutual fund is going to touch that with the zero risk factor.
Open a Roth IRA and max it out annually. You will never have to pay taxes on this.
Research! Research! Research your investment options. Too many people start 401ks, throw the money into several mutual funds the company offers and hope for the best. Look at the different funds your company offers and look them up on MorningStar.com for free. They tell you the risk factor of a fund, what its strategy is, what it invests in, who manages it, a history of performance, and a rating based on 5 stars. You can quickly pick out the winner and loser funds your company offers.
Diversify. High cap, low cap, medium cap. Value vs. Growth. International funds. Etc. Don’t put all your eggs in one basket as they say.
Don’t touch it till you retire. It’s probably better to temporarily go in debt than to borrow from your 401k. Consider it your untouchable nest egg.
There are basically three philosophies on stock trading.
The first is the ‘fundamental value’ approach. These people research companies, find ones that are ‘undervalued’ (whose stock prices are less than the real value of the companies), and then purchase them, usually for the long term. Warren Buffet is a famous example, and Graham and Dodd’s Security Analysis is their bible.
The second type are represented by smeld’s post - they’re people who believe they can time the markets, or look at charts or tapes to figure out where prices are going in the future. Their track record is extremely poor, but there are tons of them out there - mainly because they make tons and tons of money (mainly for themselves - for their clients… not so much). They look at the stock market as a kind of beauty pageant - where the idea is not to figure out which stocks are prettiest, but to figure out which stocks other buyers will think are pretty.
The last approach is advocated by academics and proponents of the ‘random walk’ hypothesis. They think changes in stock prices are unpredictable, and that the best way to make money in the stock market is to buy a diversified passive portfolio (an index fund), with smallest fees you can find, and then hold it for as long as you can.
The first approach is good if you have a lot of time on your hands, and enjoy doing security analysis.
The third approach is good if quarterly reports are not your thing, but you want to be invested in stocks anyway.
The second is good if you like to gamble, and don’t mind paying somebody else to pull the lever for you.
My own view is that stocks are overvalued, and that it’d be better to wait until prices are more in line with what they were when people like Graham and Dodds and Buffet were buying.
It’s not like Warren Buffett’s not buying stocks. According to the company website the most recent purchase (from last month) was two jewelry manufacturers called Bel-Oro International and Aurafin LLC. Prior to that, he bought the parent company of electronics distributor Mouser Electronics. In recent years he’s bought a company that makes manufactured homes and another that makes bricks. I think he’s got $10-20 billion in cash and suggested that he’s looking for another large investment.
Note that none of these investments are particularly sexy or hot properties. Buffett’s model is to buy good companies with good cash flow and good management, and to leave the management in place. He pretty much avoids buying technology companies.
The P/E ratio of the market as a whole is about 16 right now.
A little above it’s long-term median, and probably in line withwhat they were when people like Graham and Buffet were buying.
And, if you’d bought at most any time between 01-03, when P/E ratios were still rather high, historically, you’ve done pretty well.
Or maybe you’re using something else to conclude that “stocks are overvalued”. Any time you have the cash, though, and you’re not buying stocks, you’re really just trying to time the market.
My understanding is he’s not so much buying stocks, as entire companies. Bel-Oro, for example, was not - so far as I can tell - a publicly traded company before Buffet bought it.
In other words, these are not publicly traded stocks that ordinary non-billionaires can purchase.
Edit: He did make a huge bet against the US dollar a few years ago, if I remember right. Which I thought was interesting.