Author Topic: A Safe investment on the stock market?  (Read 8392 times)

Scubatoad

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A Safe investment on the stock market?
« on: February 22, 2014, 08:59:49 PM »
Hello Community.

I have been looking at the stock market for 2 years now trying to figure this beast out...
I have always been a do it yourself kinda guy and I finally decided to invest. 
I am looking for very stable investments that will pay out better than a CD...
After a few months of reading and researching...it seemed like the safest bet was to buy dividend stock...where the share price hardly fluctuates and the dividend yield is consistently good.  Additionally - I wanted a company I knew and use their products.  I finally decided on Intel (intc).  They had very little change in value over the past 2 years and have payee out approx 3% dividend on their share price for years.  I use their processors always when I build computers. 

I really felt like I had a safe investment... A while ago I finally purchased my first few hundred shares of stock...I intend it to be a long term investment... 

Am I correct in feeling like this is one of the safer ways to invest in the stock market?  Or am I off base somewhere?

iamlindoro

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Re: A Safe investment on the stock market?
« Reply #1 on: February 22, 2014, 09:17:49 PM »
Well... Not to throw water on your idea, but no, I don't think this is a very safe investment, for many many reasons (I'll try to hit the high points but I'd say you're in for a number of responses addressing many of them).

1) Being flat (Intel is actually down 7% in the last two years) over 2 years when the rest of the market is up almost 50% is a bad sign.
2) A 3% dividend in addition to being flat means you're barely keeping pace with inflation.  Your money is essentially doing no useful work for you.
3) You are completely undiversified.  One stock means that single company need only earn the ire of the market for any reason (bad earnings, the market moving towards mobile devices, etc.) and you can lose your entire investment.

I strongly recommend reading all of the following series:

http://jlcollinsnh.com/stock-series/

To summarize in very few sentences-- Depending on your level of risk tolerance (and from your choice to pick a single stock, I don't know that you yourself know what that is yet as you profess to want to do something safe, but have instead chosen to do something highly dangerous), you should allocate funds to low cost, passively managed index funds such as those provided by Vanguard (though there are good choices at Schwab, Fidelity, and others).  Buying total market index funds mean you own everything in the market (and thus are diversified - you can NEVER lose your entire investment outside of apocalyptic type events), track the performance of the index (you'd be up 40-50% in the last two years), and get dividends too (roughly 2% over the past few years in VTSAX).
« Last Edit: February 22, 2014, 09:38:05 PM by iamlindoro »

matchewed

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Re: A Safe investment on the stock market?
« Reply #2 on: February 22, 2014, 09:23:26 PM »
Also as general investing information goes there is no such thing as a safe investment. All investments have risks. It is understanding, accepting, and mitigating risks which will make you comfortable with whatever investment choices you make.

I think you may need more research on investments.

iamlindoro

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Re: A Safe investment on the stock market?
« Reply #3 on: February 22, 2014, 09:36:24 PM »
Just to add a practical example...

If you invested $10,000 on February 17th, 2012, all in Intel (365.36 shares at that time), your principal would now be worth $9,148.  You would have made $664.93 in dividends in that time, for a total value of $9,812.93.  So you would have lost money overall, not to mention two years worth of reduced buying power due to inflation.

If you invested $10,000 on February 17th, 2012, all in VTSAX (Vanguard total Stock market index, 291.88 shares at that time), your principal would now be worth $13,863.  You would have made $464.04 in dividends in that time, for a total value of $14,327.04.

GlassStash

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Re: A Safe investment on the stock market?
« Reply #4 on: February 22, 2014, 09:58:23 PM »
 

Am I correct in feeling like this is one of the safer ways to invest in the stock market?  Or am I off base somewhere?

No, in search of a safe choice you have actually ventured down one of the riskiest paths of investing. As stated by iamlindoro, your 1 stock is a much bigger risk than you anticipate. This is "putting all your eggs in one basket" and hoping that basket never wavers or falters for decades. Diversification is key, along with asset allocation.

Do read the jlcollinsnh stock series and get up to speed on index fund investing. Once you fully understand that series, you should be able to form a portfolio that is "safe".

Scubatoad

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Re: A Safe investment on the stock market?
« Reply #5 on: February 23, 2014, 05:08:04 AM »
Thank you very much for the replies.  I really appreciate the honest feedback.

Since you guys have been so detailed with your responses, I want go into a little more detail with my decision making process.

to Iamlindoro's specific example -

What is interesting, is in June of 2012, I did invest into an aggressive mutual fund with a few thousand dollars.  I saw a 25% return 14 months later!  This experiment was actually what has given me so much interest in the stock market to begin with!

However, because it was a mutual fund - I had a hard time really understanding exactly why it was growing so fast (which companies exactly, dividend payouts from what stock).  he only correlation I could find really, was that if the stock market as a whole went up, so did my investment.  And if it went down, so did my investment.

Fast forward to a few months ago, and in doing my research, I realized that this was merely an example of a fantastic or "bull" market.

And from what I was reading it seemed like the stock market has a tendency to return to its average over time.  A few months ago, the market was near an all time high, which lead me to believe that the market as a whole may decline in the coming year.  Thus seeming like an individual stock, being stable to yield more than an index fund in a declining market.

So, thus I began my quest to look for a stable stock that pays dividends, which brings me to my story above I posted.  I will caveat that the shares I bought in INTC were a very small percentage of my overall capital - and it has been more of a test run - so that I can really understand the process and dividend payouts, and the taxes that come with in a hands on way.

This is not my only investment, and i am still considering many other options.

I do understand that individual stock is a much higher risk than mutual or index funds, and I suppose I should have phrased my subject better - in saying a safe way to invest in Individual stocks.

For anyone still reading - Am I way off in my logic for the whole process - I can take harsh criticism - so please do be honest!

warfreak2

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Re: A Safe investment on the stock market?
« Reply #6 on: February 23, 2014, 05:25:47 AM »
And from what I was reading it seemed like the stock market has a tendency to return to its average over time.

No.



It has a tendency to return to its average growth rate over time. As in, in the long run it keeps going up.

soccerluvof4

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Re: A Safe investment on the stock market?
« Reply #7 on: February 23, 2014, 05:58:47 AM »
I think for the most case your going to get an agreement from most here. To your sole individual case if it was a learning experience that you were willing to chance then so be it. Diversification as even you admitted is the key so there would never be a case to be a single stock holder unless obviously you worked for a company that gave you stock options or other exceptions. In the very least if you were say a trader you would still want to hold 8-10 stocks in a retirement portfolio but again diversified and cyclical to stabilize your portfolio. But there to unless you really do the research, use stop, losses or other trading tools your better off in index funds.

grantmeaname

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Re: A Safe investment on the stock market?
« Reply #8 on: February 23, 2014, 07:52:51 AM »
I do understand that individual stock is a much higher risk than mutual or index funds, and I suppose I should have phrased my subject better - in saying a safe way to invest in Individual stocks.

For anyone still reading - Am I way off in my logic for the whole process - I can take harsh criticism - so please do be honest!
Yes. There is no safe way to invest in individual stocks and owning individual stocks is not safe.

KingCoin

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Re: A Safe investment on the stock market?
« Reply #9 on: February 23, 2014, 09:23:24 AM »
I'd add and reemphasize the following points:

1) Diversification is the only free lunch in investing. A diversified stock portfolio has the same expected return as an undiversified one, but with much lower volatility. That makes a single stock portfolio a huge mistake and indisputably suboptimal.

2) While diversification is a free lunch, there is no free lunch when it comes to risk and return. That magic low risk, high return investment doesn't exist in the publicly traded markets. That's the unfortunate nature of efficient markets.

3) Recent performance is no guarantee of future performance. Intel looks stable now, but it lost 81% of its value from 2000 to 2002. It lost 52% of its value from 2007 to 2009.

4) Dividend payers have pretty similar volatility to the S&P500.
https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1393170178904&chddm=497743&chls=IntervalBasedLine&cmpto=NYSEARCA:VYM&cmptdms=0&q=NYSEARCA:SPY&ntsp=0&ei=_BYKU_D1EuTt6wHdtQE

5) Investing in stocks is about strapping in for the long haul and having faith that stocks will continue to deliver 7-9% returns with plenty of bumps along the way. If you're looking for steady returns on a year to year basis, you're barking up the wrong tree.

6) If you're truly looking for something with lower volatility and steady returns, you should be looking in bond land, not equity land. You could buy something like ticker ELB which is a first lien mortgage on a utility company and should deliver 6% without too much volatility. (Note that if you buy bonds, you should be diversified as well, and you're subject to negative price moves if interest rates rise meaningfully).
« Last Edit: February 23, 2014, 09:35:12 AM by KingCoin »

sheepstache

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Re: A Safe investment on the stock market?
« Reply #10 on: February 23, 2014, 11:04:21 AM »
Scubatoad, it sounds like you don't really understand why index funds are so awesome?  So you're not investing in them because you don't understand them.  So you should remedy that.

The one thing I will say in favor of individual stocks has to do with psychology.  If you are less likely to sell in a market crash because you know the companies you're invested in, that could be an advantage.  However, you have to really know the company in depth, their structure, their accounting practices, etc., not just knowing their product.

edited to add: What I'm trying to say here is that it's good you don't want to invest in something you don't understand.  I just think in this case the solution is to understand it.
« Last Edit: February 23, 2014, 11:41:17 AM by sheepstache »

the fixer

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Re: A Safe investment on the stock market?
« Reply #11 on: February 23, 2014, 11:23:22 AM »
And from what I was reading it seemed like the stock market has a tendency to return to its average over time.  A few months ago, the market was near an all time high, which lead me to believe that the market as a whole may decline in the coming year.
This is a commonly-held misconception. http://blog.alliancebernstein.com/index.php/2013/11/22/the-market-hits-all-time-high-so-what/
[this is not the source where I first learned about this pattern, but it will do!]

As for your concerns about mutual funds, there are two types:
  • Actively-managed funds buy whatever the fund manager thinks is a good investment. Buying one would basically be outsourcing your stockpicking activities.
  • Passively-managed funds trade according to set rules explained in the fund's prospectus, no matter what the market is doing. For example, the Vanguard Total Stock Market Index Fund maintains a market cap-weighted portfolio that tracks the performance of stocks in the CRSP US Total Market Index. To reduce costs, the fund samples the index by only trading certain companies that are supposed to be representative of the performance of an entire sector within the index.
So basically, read the prospectus before you buy shares of a mutual fund. You should be able to understand everything you'd like to know from that.

Joel

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Re: A Safe investment on the stock market?
« Reply #12 on: February 23, 2014, 11:23:55 AM »
Index funds are the "safest" stock market investment you can make.

kyleaaa

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Re: A Safe investment on the stock market?
« Reply #13 on: February 23, 2014, 11:46:15 AM »

Am I correct in feeling like this is one of the safer ways to invest in the stock market?  Or am I off base somewhere?

Way off base. This is one of the absolute riskiest ways to invest in the stock market. Buy an index fund instead.

Scubatoad

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Re: A Safe investment on the stock market?
« Reply #14 on: February 23, 2014, 12:08:40 PM »
Thanks all for the constructive replies and the links! 

Just out of curiosity - what do you guys recommend for an aggressive approach to the stock market? 

It seems like index funds are a fantastic way historically to get a safe solid return on an investment.

If someone was very young, and had a very stable income significantly higher than their expenses, and they were willing to take some significant risk, would you guys still all chant "index funds!" or would you guys then recommend individual stocks or something else maybe?

warfreak2

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Re: A Safe investment on the stock market?
« Reply #15 on: February 23, 2014, 12:18:18 PM »
How much significantly higher is your income than your expenses? If you're earning 4-5x what you spend, you might be retiring pretty soon (~5 years) anyway. The sooner your retirement, the less aggressive your asset allocation should be. I don't see why you would want to take more risks. Anyway, 100% of your investments in index funds is still considered a very aggressive portfolio.

KingCoin

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Re: A Safe investment on the stock market?
« Reply #16 on: February 23, 2014, 12:20:20 PM »
Just out of curiosity - what do you guys recommend for an aggressive approach to the stock market? 

Generally, small cap stocks are higher risk and higher return than large cap stocks. So if I wanted to be more aggressive, I'd more heavily weigh a small cap index fund in my portfolio. Alternatively you could overweigh stocks in general, making them 80-100% of your portfolio rather than a more traditional 50-80%.

If someone was very young, and had a very stable income significantly higher than their expenses, and they were willing to take some significant risk, would you guys still all chant "index funds!" or would you guys then recommend individual stocks or something else maybe?

Again, you're misunderstanding the relationship between individual stocks and indices. Individual stocks add more risk but not more return. That's the free lunch of diversification - less risk, same return.

The exception is if you bought a diversified pool of extremely high risk stocks. Perhaps small mining companies and the like. This is just a more targeted way of choosing high risk, high return stocks, not anything magical about choosing individual stocks per se. You still need to diversify both across individual companies and industry.
« Last Edit: February 23, 2014, 01:07:18 PM by KingCoin »

wtjbatman

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Re: A Safe investment on the stock market?
« Reply #17 on: February 23, 2014, 01:42:33 PM »
It's been said, but I'll repeat it (and this is coming from a guy who doesn't do index investing, and invests in individual dividend stocks). It sounds like you have to learn a lot more before you start investing period. And you definitely shouldn't be investing in individual stocks until you have a lot more knowledge of risk vs return, what dividend investing is, what index funds are, what a "stable and safe investment is" (here's a hint: it's not putting all of your money in ONE company), etc.

Someone linked jcollin's stock series, read that. Check out Bogleheads next.

And ironically, even from a dividend (growth) perspective you picked a stock that has fallen way out of favor recently due to Intel's failure to raise their dividend last year, ending their dividend growth streak.

the fixer

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Re: A Safe investment on the stock market?
« Reply #18 on: February 23, 2014, 02:03:03 PM »
For someone looking to be extremely aggressive, I would recommend something like this:
40% VTSAX
30% VGSLX
30% VSMAX

What you're doing is overweighting small cap and REITs which have a lot of volatility. Small cap tends to get higher returns in exchange for that volatility, but it may take 30-50 years to see that return. REITs get returns roughly on par with the stock market over time, but the returns aren't always correlated. Uncorrelated assets are the key that makes diversification work, because you can rebalance and buy the underpriced asset using proceeds from selling a bit of the expensive one.

(the above tickers are for Vanguard Admiral shares which require a $10k minimum investment. There are equivalent Investor-class funds that behave the same, just with slightly higher expenses and $3k minimums)

By the way, 100% VTSAX is not a "safe" investment, it's still extremely volatile. But it is probably the safest investment within the stock market. Most people are more conservative by adding some portion of bonds (a low-yield but low correlation asset) to their portfolio.

luigi49

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Re: A Safe investment on the stock market?
« Reply #19 on: February 23, 2014, 03:05:00 PM »
I think it is irresponsible to say that index fund is the safest way for investment.  When you deal with equities there is an inherent risk.   You have to determine what your risk tolerance when you are investing.  In 2008 index fund was cut in half or more. Will you be comfortable with your investment cut in half or more.   Without the fed QE I highly doubt that the inde fund would come back the way it is now.  Safe and equities does not go together. 
« Last Edit: February 23, 2014, 03:07:13 PM by luigi49 »

KingCoin

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Re: A Safe investment on the stock market?
« Reply #20 on: February 23, 2014, 03:15:26 PM »
I think it is irresponsible to say that index fund is the safest way for investment.  When you deal with equities there is an inherent risk.   You have to determine what your risk tolerance when you are investing.  In 2008 index fund was cut in half or more. Will you be comfortable with your investment cut in half or more.   Without the fed QE I highly doubt that the inde fund would come back the way it is now.  Safe and equities does not go together.

If it wasn't made clear, I'm confident that everyone was saying indices are the safest way to invest in equities, not the safest way to invest period.  Though, it could reasonably be argued that assets like cash and bonds are riskier than equities long term.

ShortInSeattle

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Re: A Safe investment on the stock market?
« Reply #21 on: February 23, 2014, 03:41:26 PM »
Thanks all for the constructive replies and the links! 

Just out of curiosity - what do you guys recommend for an aggressive approach to the stock market? 

It seems like index funds are a fantastic way historically to get a safe solid return on an investment.

If someone was very young, and had a very stable income significantly higher than their expenses, and they were willing to take some significant risk, would you guys still all chant "index funds!" or would you guys then recommend individual stocks or something else maybe?

When you say "would we still all chant "index funds"" are you implying that the advice you are getting is some kind of mindless cheerleading?

Your language makes me curious. :)


wtjbatman

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Re: A Safe investment on the stock market?
« Reply #22 on: February 23, 2014, 04:03:22 PM »
Thanks all for the constructive replies and the links! 

Just out of curiosity - what do you guys recommend for an aggressive approach to the stock market? 

It seems like index funds are a fantastic way historically to get a safe solid return on an investment.

If someone was very young, and had a very stable income significantly higher than their expenses, and they were willing to take some significant risk, would you guys still all chant "index funds!" or would you guys then recommend individual stocks or something else maybe?

When you say "would we still all chant "index funds"" are you implying that the advice you are getting is some kind of mindless cheerleading?

Your language makes me curious. :)

If he thinks there's a lot of cheerleading for index funds here, wait till he reads the Boglehead forums.

Scubatoad

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Re: A Safe investment on the stock market?
« Reply #23 on: February 23, 2014, 04:22:26 PM »
No it wasn't to imply mindless cheer leading - more trying to convey that I understand the strong emphasis on them from the replies I have received thus far.  Which I was expecting, given that MMM does the same.

And after several more hours of reading up on them this afternoon - I think I do see why they are so appealing given the history of the market in the past 114 years as someone so nicely linked a graph above.

I do think that investing in single shares of stock now seems a little misguided for my current goals/opportunities. 

Looking at all the different graphs and charts over the years make the index funds very appealing - but I think there is something in me that continuously tries to go against the grain, or at least not get trapped into the "everybody's doing it".  I have always tried to think outside the box and I think that is what landed me where I am currently at.

I may consider pulling out my investments on monday (3 different stocks) which are as of close last friday up 2.7% from my  original investment about 3 weeks ago.  At least I would have learned a lesson - and not gotten burned financially (only my ego takes a hit and my stubble account on MMM gets laughed at).

I then think I will need to re-look things over as for some reason I still dont find myself wanting to dive right into an index fund right now with the market so high - but maybe that is just a typical amateur mistake...

grantmeaname

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Re: A Safe investment on the stock market?
« Reply #24 on: February 23, 2014, 04:28:32 PM »
I then think I will need to re-look things over as for some reason I still dont find myself wanting to dive right into an index fund right now with the market so high - but maybe that is just a typical amateur mistake...
It may look high now but I like to think that I'm still buying in at a lower price than the market will be at in 2025 or so when I first start selling.

FIPurpose

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Re: A Safe investment on the stock market?
« Reply #25 on: February 24, 2014, 10:47:59 AM »
And from what I was reading it seemed like the stock market has a tendency to return to its average over time.

No.



It has a tendency to return to its average growth rate over time. As in, in the long run it keeps going up.

I think what a lot of people have a hard time imagining is that in 20-30 years the market of today will look like one of those little blips from 30 years ago.

GlassStash

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Re: A Safe investment on the stock market?
« Reply #26 on: February 24, 2014, 10:55:45 AM »
And from what I was reading it seemed like the stock market has a tendency to return to its average over time.

No.



It has a tendency to return to its average growth rate over time. As in, in the long run it keeps going up.

I think what a lot of people have a hard time imagining is that in 20-30 years the market of today will look like one of those little blips from 30 years ago.

With the 24/7 news cycle and internet access to everything, it's understandable that many people are prisoners of the moment.

Vjklander

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Re: A Safe investment on the stock market?
« Reply #27 on: February 24, 2014, 11:01:33 AM »
One thing you could do is set up a shadow portfolio on Yahoo or Google, give yourself $1,000,000, buy 10 stocks around $100,000 each and follow their trials and tribulations. You can also set up a shadow portfolio with the Funds of choice for comparison.