Author Topic: Investment advice 2014! Indexes vs. trying some individual stocks  (Read 4526 times)

Duke

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Hi all! I've been learning the Way of the Mustache for a few months. I graduated college in 2012 so I've been working full time for about fifteen months. I'm torn about where to put my investments for 2014, and was hoping you might be able to give me some advice. Here's the situation:

- I'm maxing out my 401k and a Roth IRA, so let's call that good to go for the purpose of this post.
- Beyond that, I have about $6000 in a personal account in the Vanguard 500 index fund (VFINX).
- Let's say I have about $1000 a month to put into personal investments, starting now.

I've been thinking about getting into stock trading using a discount online broker (tradeking.com), but I'm torn about it - there are of course a lot of deeply conflicting opinions online, including:

- Indexes are great, but stocks are the ticket to real wealth!
- It's okay to put 5-10% of your portfolio in individual stocks you've thoroughly researched.
- Having individual stocks is useless unless you can choose five companies with the skill of Warren Buffett or choose thirty across different industries.
- If you're investing between $500 and $10,000, it's a toss up between indexes and individual stocks. Above $10,000, go with stocks.
- I suspect that MMM himself would say something along the lines of "Don't do it! Stock picking is no better than going to the casino! Stick with indexes, ALWAYS." (especially judging by his Pig's Feet characterization in this post: http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market)

If you were in my shoes, would you:

- Buy some individual stocks! It'll be fun. Choose some market leaders that (some people think) will perform in 2014 and long term, like AAPL or FSLR.
- Buy some stocks, but don't bother with the market leaders: the index funds already have them en masse. Instead use individual stock trading as a place to find a relatively unknown company and gamble on its growth potential.
- Don't buy stocks. Pour it all into indexes. (Also, when I have $10,000, I can switch to VFIAX or VTSAX, which cuts my expense ratio from 0.17% to 0.05%.)

Obviously the debate between stock picking, managed funds, and index funds is as old as Bogle's thesis, but I was hoping you guys might be able to give some thoughts based on my particular situation.

Duke

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Re: Investment advice 2014! Indexes vs. trying some individual stocks
« Reply #1 on: January 04, 2014, 08:42:03 PM »
PS - I realized I never mentioned anything about my investment horizon. This is all for the extreme long term (20, 30, 40 years).

Khan

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Re: Investment advice 2014! Indexes vs. trying some individual stocks
« Reply #2 on: January 04, 2014, 09:01:00 PM »
Stock picking by just picking names(such as FSLR/AAPL) is not the way to do it if you actually intend to choose your own investments.

Read the investing tome The Intelligent Investor. Read one of Peter Lynch's books.

Learn about different investing thesis', I'm partial to Dividend Growth and value investing myself.

Learn your resources, Seekingalpha.com, yahoo finances. Learn how to read a conference call, to read the financial statements. If you're bullish on a stock, read the bear thesis, or vice versa.

Now here's the stickler: Even after all that work, and it is work, you would be better off putting those hours to something you love and investing in an index. It is unlikely that all of those hours will even add a single dollar of value to your positions. On top of that, VFINX isn't the only vanguard fund. There are the ETF's VTV and VIG as well(which are exactly what I personally want to put my money in instead of the entire market VFINX).

I personally love the act of investing, I find it enjoyable, but if you don't, then DON'T WASTE YOUR TIME. I accept that I may, and likely will underperform the market, however I prefer to know why I am making any return at all.

Joel

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Re: Investment advice 2014! Indexes vs. trying some individual stocks
« Reply #3 on: January 04, 2014, 09:02:05 PM »
Indexes.

It takes too much time and effort to beat the market. There are people that do it for a living, and on average, they end up trending with the market. Save your time and efforts.

Stache In Training

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Re: Investment advice 2014! Indexes vs. trying some individual stocks
« Reply #4 on: January 04, 2014, 10:15:35 PM »
There has only ever been one man to EVER consistently beat the market: Warren Buffet.  If you could pick stocks as good as him, and knew as much about stocks as him, you probably wouldn't be on this forum asking for advice.  Therefore, choose index.  Because while you'll never beat the market, you'll never under-perform it either.

Since you're looking at 20, 30 and 40 years down the road, I'd rather pick a few indices, otherwise you'll spend a lot of time and energy over the next 20 to 40 years, choosing your stocks, when you could just choose the 500 index or total market index and let them do the choosing for you... all while most likely out-performing what you would have, by picking stocks. 

So as already said, the time effort put in to picking stocks is a lot, and in my viewpoint not worth it.  The only way it'll be worth it, is if you somehow become the 2nd man to ever consistently beat the market.  Which I guess is technically possible...

Khan

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Re: Investment advice 2014! Indexes vs. trying some individual stocks
« Reply #5 on: January 04, 2014, 10:24:23 PM »
Peter Lynch beat the market.

But that's besides the point, and Buffett, is actually outside the scope of the market, as he has access to leverage no other person does. Because of the ability to invest the insurance float from his Berkshire Hathaway insurance business, he has essentially 0% cost leverage to use on his investments.

So combine great money mangement ability with 0% cost leverage, an amazing team(Charlie Munger, the rest of Berkshire Hathaway management team), and the ability to buy companies whole that meet his criteria.

Yeah, none of us can even attempt to be Buffett.

twbird18

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Re: Investment advice 2014! Indexes vs. trying some individual stocks
« Reply #6 on: January 05, 2014, 08:30:44 AM »
Peter Lynch beat the market.

But that's besides the point, and Buffett, is actually outside the scope of the market, as he has access to leverage no other person does. Because of the ability to invest the insurance float from his Berkshire Hathaway insurance business, he has essentially 0% cost leverage to use on his investments.

So combine great money mangement ability with 0% cost leverage, an amazing team(Charlie Munger, the rest of Berkshire Hathaway management team), and the ability to buy companies whole that meet his criteria.

Yeah, none of us can even attempt to be Buffett.

It is moderately unfair to classify Buffett as outside the market. I mean now BH is, but he built that wealth from basically nothing ( well and other people's money). It is not as if he didn't use his knowledge to make all of those initial decisions and he did it back when you had significantly more trouble accessing information about those companies.

gebraset

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Re: Investment advice 2014! Indexes vs. trying some individual stocks
« Reply #7 on: January 05, 2014, 09:51:03 AM »
Index. Pay the small management fee and reap the benefits of having multiple businesses go up as the market improves. You also better yourself from a crazy mishap if one individual company seemingly out of nowhere claims bankruptcy or gets bought at only to be discontinued. Overall, I prefer them for their ease, safety over individual stocks, and no trading fee (Sans the management fee of course).