This is the second article in a series that will discuss and explain basic investment concepts in hopefully an understandable and meaningful way. Whether you work with an investment advisor or choose to do your own investing, there are some there are things you need to know to be successful. Here is my take on what those things are.
Think of stocks as companies. You will sleep better. The very word “stocks” has a negative connotation for many of us. They can be scary. They crash. You can lose all of your money. An easy way to deal with this is use the word companies instead. Stocks are companies. A significant portion of the world’s wealthy got that way by owning companies. How would you feel if you owned 100% of Google, Amazon, Exxon or Apple? You would feel rich. Well you probably don’t have enough money to own 100% of any of those companies. However, you do have enough money to buy a mutual fund and own pieces of a whole bunch of companies. When things are scary in the stock market, open up the most recent annual or quarterly report you have received from your stock mutual fund and look at the list of companies you own. I bet that you will feel better.
Invest in your companies for the long term. How long does it take to start and grow a company? The answer is a long time, as in years. We all live in an instantaneous world and we have no patience. Lacking patience is a handicap when it comes to investing in companies. You might be thinking that you are too old to own companies for a long time. I would suggest that your investment time frame is the rest of your life.
Some final thoughts on stock diversification. In a previous article I strongly suggested that you own many different flavors of stocks diversified by geography (U.S, International and Emerging Markets) and also by size (small, medium and large). Google the “Callan Periodic Table of Investment Returns” and you will see why you need such diversification. The chart goes back 20 years and lists year by year performance numbers for eight different stock categories in order from best to worst. Each stock category is a different color. Pick one color and follow it through twenty years of yearly performance. You will soon come to the conclusion that the year by year returns for any stock category (or bond category for that matter) are absolutely random and therefore not predictable. You will come to the conclusion that buying last year’s best performer is not a good investment strategy. Your will soon come to the conclusion that you will need lots of stock colors in your portfolio, because you will not be able to predict next year’s winners or losers. When you do come to this conclusion, you will know the most important thing to know about investing. Everything else is easy!
If you missed reading any previous articles in this series, they will be posted on my website McNamaraFinancial.com. If you have any questions of comments, I can be reached at mike@McNamaraFinancial.com. I promise that i will respond.
Michael J. McNamara Ph.D., CFP®
CERTIFIED FINANCIAL PLANNER™
*Any financial advice in this article is intended to be generic in nature. Readers should consult with their own financial advisors before implementing any advice or suggestions above.