The brave souls who rode out the stock market storm have been rewarded in recent months. Happily, I’m in that group.
I developed an interest in stocks in college, and the market still fascinates me. Since my first buy in 1972, I haven’t been out of the market. Over those 31 years I have learned a lot about the in’s and out’s, the do’s and don’ts of investing.
One of the most important lessons: You can’t win in the investment game unless you’re in the market. Thus, if you get scared and sell when the market drops, you won’t be in the game when it turns up. If you do get out when the market drops you are following a dubious investment strategy of buying high and selling low. Additionally, upturns are sudden and substantial, such as we have seen in recent months. Usually there is no time to jump back in the market before the opportunity is lost. Carefully ponder the Shakespeare quote at the end of this column for inspiration.
A valuable resource
At about the same time I became a stock investor, I became a reader of The Kiplinger Letter, which offers a range of information for making management decisions. I have found Kiplinger on target more often than not. Last week’s issue stated that the bull market is not over. The outlook for the third quarter is less than stellar — but don’t lose the faith.
The market is likely to gain around 10% over the next year despite ups and downs along the way. If you miss the upswings, you’ll lose.
Diversify, diversify, diversify
Investing in the market begs the question of which stocks to buy. The secret of winning in the stock market is diversification. You need to have investments in enough stocks so that winners offset losers. Otherwise, you might invest all your funds in one stock and it be a loser.
If you have $500,000 or more to invest you can engage a money manager and reap the benefits of professional stock selection. Otherwise, you would be better off with a mutual fund and enjoy the benefits of professional management that way.
Assuming the mutual fund route is chosen, and in most cases it should be, another decision arises. Should you trust your fortune to the skill of a stock picker or “go with the flow” by investing in index funds.
In the June 7, 1999 issue of Newsweek, renowned financial guru Jane Bryant Quinn makes the case that index funds are the way to go.
According to Quinn, even if you invest in a dozen different stocks, you won’t really achieve diversification. “As a practical matter, you haven’t diversified when you own a portfolio of individual stocks. You won’t buy the right number and type to cover all the bases — the value stocks, growth stocks, small stocks and proper, global-industry sectors.”
In choosing mutual funds over individual stocks, Quinn has this to say. “Naturally, people feel smart when stocks go up. But does your IQ drop when stocks go down? Either way, I call it luck.”
My experience confirms Quinn’s wisdom. I began buying index funds from the Vanguard Group in 1994 and have deviated little since then. I was rewarded richly when the S&P Index headed skyward in the 1990s and punished mightily over the last couple of years. But, I’m still there and I was there over the last two months when the S&P again headed up.
Index funds assume that no one can consistently outperform the market as a whole. Thus, they invest in all the stocks that make up the index. When the index goes up, your investment goes up by the same amount since the fund exactly tracks the index.
My only two exceptions to investing solely in mutual funds over the last nine years was when I got too smart for my intelligence and bought some WorldCom and Friede Goldman. Both companies are now bankrupt and that entire investment went down the drain. And thus I deviated from my sound investment plan and paid the price. Oh well, retirement probably isn’t all that it’s made out to be anyway.
Thought for the Moment — There is a tide in the affairs of men, which, taken at the flood, leads on to fortune; omitted, all the voyages of their life is bound in shallows, and in miseries. On such a full sea are we now afloat. — Shakespeare
Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at firstname.lastname@example.org.