June 28, 2020
You take the plunge, and you invest.
While the answer to that question may, at first glance, appear rather cut and dry, it is in fact rather nuanced. The first thing you should ask yourself is:
“How involved do I want to be in this?”
Many online gurus and stock pickers will act as if hiring a trusted financial professional is no better than if you took that money and lit it on fire. Obviously, this is not true; in fact, there are many worse things you could do with your money than hiring a trusted professional to manage your hard-earned funds. If that is the case, find a firm such as Vanguard or Merrill Lynch and work with a Certified Financial Planner (CFP) and only ever have to worry about regularly making contributions to your various accounts. This option can be incredibly appealing to those who do not want to spend hours (yes, hours) a week reading through articles and SEC filings in order to find the next great investment.
That is a great approach if you wish to be rather hands-off as you save for retirement, college for your kids, or really anything.
“I want to manage my money myself, in order to limit fees, but I want to find safe places to park my money. What about if I want to take a set-and-forget approach to my investing?”
That’s really where investing in index and exchange-traded funds shines. In fact, world-renowned investor Warren Buffett is not a fan of the average person investing in individual stocks. When asked about if individual investors should get involved in stock picking, he stated:
“If you like spending 6-8 hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds. This accomplishes diversification across assets and time, two very important things.”
Dollar-cost averaging? That sounds complex.
Actually no, it’s rather straightforward and I’ll explain it here.
Basically, what the Oracle of Omaha is saying is that the average investor would be very well-suited to buy into index funds regularly throughout their lifetime, and this is honestly true. The S&P 500, normally representative of the United States stock market as a whole, has proven to be one of the single best investments you could make in the past 100 years. If that sounds like a stretch, just go on to any compound interest calculator and see how large a number gets with 10% annual growth (which is what the S&P 500 has done on average year in and year out with dividends reinvested).
If this sounds like the right type of investment for you, and for most people it should be, I highly recommend investing regularly in the publicly traded ETF that follows the S&P 500, SPY. It tracks the performance of the market and is a stable performer year in and year out, and even pays a dividend for those who enjoy getting a little cash for sitting and doing nothing.
But you’re a stock-picker, why would you suggest I invest in index funds?”
Our message here at The Tempered Bull is all about striving for your financial freedom, and a large part of that message is freedom. If you’re spending 6-8 hours a week reading through investing articles when you could be doing something else you enjoy, then find the path of least resistance. Regularly and automatically buy into the market, regardless of short-term market fluctuations, and sleep well each night knowing your investments will probably have grown quite a large amount from very minimal work.
But some people, myself included, enjoy reading articles, pouring over balance sheets, and diving into the fundamentals of companies that intrigue them. To those like me, I encourage you to try and beat the market. The upside to investing in the S&P 500 is you get to hold all those amazing companies that routinely crush the broader indexes and grow at an amazing clip, but the downside is you will be buying plenty of other companies that you might not care about, that actually lower the returns you see from those great companies. When you buy into the S&P 500, yes you get ownership in great companies such as Microsoft, Amazon, and Apple, but also the likes of Xerox, and let’s be real, do you really have that same level of conviction in holding Xerox as you have in Amazon?
This is where well-researched stock-picking and holding for the long-run can make all the difference in your portfolio.
If you’re brand new to stock-picking I’m sure you’ve seen that there are hundreds of resources out there, in fact it can get overwhelming because of this. For many publicly traded companies there are those pounding the table in approval, and those insisting that certain doom will befall whoever even looks at the company as an investment.
My first step I would recommend to you is to make a watchlist. Now a watchlist should consist of all the companies you want to regularly check in on. Whether you currently own them, or you want to own them, a watchlist can help you keep tabs on potential investment ideas. I’m a big fan of filling out a watchlist stock by stock, and then regularly checking in on my watchlist companies for months before buying. It would be downright wrong if I were to write up an article about watchlist and not throw some companies out there that I’m currently watching. Some companies on my watchlist include: Bank of America (BAC), Home Depot (HD), and Fair Isaac Corporation (FICO). If you’re starting to make a watchlist for the first time, these companies can be a great place to start!
** Disclaimer: The Tempered Bull is committed to enhancing the finance wellbeing of our readers; however, these articles should not be your only resource. The suggestions made here are meant to be taken in conjunction with professional financial assistance. We are not financial professionals, just regular people with a passion for sharing our experience. The Tempered Bull does not have any private knowledge about the companies we discuss, and The Tempered Bull and its associates do not benefit from your purchase or sale of any equites. The Tempered Bull has a disclosure policy.