Monthly Archives: September 2016

Stock Market Investing 101 – Buy Mutual Funds and ETF’s And Avoid Stocks

Don’t Invest In Stocks! The “Kramerheads” and day traders will certainly flame me for that comment. Thankfully my job isn’t to make friends with “Kramerheads” and day traders. My job is to help investors build and maintain wealth.

I’ve advised thousands of clients over the last 17 years for some of Wall Streets largest firms. I’ve seen a lot of things and a lot of different client situations. One thing I haven’t seen is a lot of happiness from stock investors. In fact I’ve seen far more discontent and anxiety.

The best stock investment advice is don’t invest in stocks! Instead opt for no-load mutual funds and exchange traded funds. Preferably mutual funds and exchange traded funds (ETF’s) with low expenses and broad diversification – such as passive or index funds.

Mutual funds and ETF’s are broadly diversified pools of investment assets. The mutual fund and ETF managers combine investment dollars to achieve a stated investment goal, such as growth, income, or a balanced approach of both.

Mutual funds and ETF’s may invest in stocks, bonds or other assets like commodities. They save investors the headache and frustration of investing in those individual securities on their own. Knowing which securities to invest in, when to buy and when to sell is overwhelming at best.

It’s A Matter Of Perspective. When I tell clients not to invest in individual stocks, the first question is “Why not?”. The fact is it’s a matter of perspective and life choice in a lot of ways (though it can easily be argued it’s a matter of statistics and actual investment results). If you feel as an investor that peace of mind and sleeping at night is more important than trying to hit the lottery with a lucky stock pick, then your perspective definitely lends itself to mutual fund and ETF investing.

It’s been clear to me over the years. Clients with diversified mutual fund and ETF portfolios have enjoyed a greater quality of life (specifically due to their investment experience). They sleep better at night, they don’t have as much stress and they generally have a greater focus on enjoying life than trying to beat the market! There’s nothing quite like not worrying about APPLE’s next earnings report, government regulations on the health care industry or shifts in consumer behavior.

The mutual fund managers on the cover of Money magazine, the funds on the Forbes Honor Roll, or the highest Morningstar rated funds statistically have a difficult time repeating that performance. I never recommend chasing mutual fund performance. It’s a fools errand and almost always ends up in frustration over time.

As a veteran financial advisor, it boils down to the risk you’re willing to take as an investor. To achieve an investment goal, there’s the risk you must take and the risk you choose to take.

The risk you must take is the systematic (also called undiversifiable or market risk) risk associated with a particular asset class. That risk you can diversify in large part through the use of mutual funds and exchange traded funds. The stock market goes up, down, sideways – that’s systematic risk. It’s a normal part of investing.

The risk that’s ADDITIONAL to an entire asset class is called UNsystematic risk. UNsystematic risk is also called diversifiable or specific risk. It’s the risk associated with individual stock (or other security) investing.

Individual companies are more susceptible to regulations, taxes, changes in consumer desires, labor issues and other factors (including accounting irregularities and fraud for example ENRON!). That risk can be mitigated by investing through mutual funds and ETF’s (diversified away). Individual stocks fluctuate with the entire market AND with changes (both positive and negative) to their specific situation.

You may be thinking “but my cousin bought (insert a stock such as Chico’s or Hansen Natural) and got rich and so can I!”. True, you can hit it big. But look at how many people LOST on similar stock bets.

For example Qualcomm when it collapsed with the dotcom meltdown. The stock went from almost $90 a share to about $13 a share two years later. You may have been in early and made a ton of money – only to see it evaporate. And if you were late to the ball you may have been completely wiped out!

Investors are compensated for the systematic risk that comes with investing in the stock market over a long period of time. They are not compensated for the EXTRA risk associated with individual securities. If you’re not compensated for the additional risk – why would you subject your portfolio to it?

Buying stocks is more like speculating than investing! My wealth management firm is located in Las Vegas. There are plenty of things to gamble on here. Individual stocks shouldn’t be one of them.

Investing is a long process of defining your financial plan and how your investment management fits into it. There’s no need to gamble with your financial plan. Investing is a marathon, not a sprint! Treat it as such and your chances for achieving your financial goals will soar!