dmikon, you crack me up, trying to teach me about the market as if I don't know what an index fund is.

"That's why you diversify and own the whole market. We don't know what the best performing market segment will be."

No you dont want to diversify into the whole market. Diversification being helpful is a HUGE myth. Look at the ones who are truly successful they are in 5-20 stocks at one time MAX.

If you want to be an average investor by all means go into an index fund and other actively managed funds that can get you less than double digit returns. With a little work and not luck you can easily expect to get over 10%.

 

I didn't try to teach you anything. I just pointed out that I was talking about index funds and not savings accounts, like you stated earlier.

Please explain how diversification is a myth. The only reason why people might think so is due to recency bias. 'I was diversified and I still lost XX% in 2008!'. Diversification is important, and works because:

- You do not know the future. Cherry-picking stocks or market segments is a road to failure in the vast majority of cases. You mentioned 'the truly successful' and yet you fail to point out what percentage of long-term investors manage to do so long-term. As I pointed out, statistically speaking, the majority of professionals in the field fail to do this. Why do you think you can? Furthermore, why do you recommend the OP, who never even invested in a mutual fund, do this?
- Diversification, via re-balancing, allows you to buy low, and sell high. As a simple example, say you have a 75/25 stock/bond mix. The market goes through a big drop, your mix becomes 70/30. You sell some bonds and buy more stocks to bring your allocation back to 75/25. Easy way to buy low, and sell high.

Here's a little article on diversification by Larry Swedroe that gives an example of this "myth" in action:

Link

Also, why own 5-20 stocks? That's diversification too, just on a smaller scale. If you know the future, as you seem to imply, put your money into the one best performing stock. Why dilute your profits with this antiquated concept of diversification?

Index = average is a myth. Investing in index funds, statistically speaking, produces better long-term results than actively managed funds. You're average compared to the index return (you own the index), not average compared to peer returns.

Of course, once you figure out the magic stock picking strategy that will let you easily identify the top performers of the future, you will make a killing. I call it the 'I have a crystal ball and you don't' strategy. Good luck with that .

In all seriousness, you're the first person I've heard saying 10%+ returns and 'little work' in the same sentence. Almost anyone who is even remotely successful with day-trading spends their days living and breathing stocks. Little work + solid returns = luck.

 

If you understand and know the market you can make huge returns.

This is my email I sent to friends on 2/16/09 about my top picks for a $1million portfolio

"Here it is with a $1million breakdown,,,,time range 6-12 months,,,we will look at it in December and calculate where that $1million got me.

WEL- $50,000 worth at $1.30
NRF-PB $350,000 worth at $9.37..keep in mind the $2.06 dividend yearly per share= $77,000 in income.
AGM - $150,000 worth at $4.23
FBP- $100,000 worth at $4.95 (plus the dividend)
AGNC- $350,000 worth at $16.88 (also a dividend stock, but not fixed dividend like NRF preffered)"


WEL now worth $114,615
NRF-PB now worth $559,925+ dividends of $96,000= $656,000
AGM now worth $512,765 plus a small divi i dont care to calculate
FBP this was my bad pick now worth 11,313
AGNC now worth $568,957 plus dividends of $164,840= $733,797

Total $1million investment return a year and 4 months later= $2,028,490

Not bad.

I completely disagree that people can't manage their own accounts by stock picking, I never said to be a daytrader although yes for s&p 500 emini trading that is daytrading. And yes there are plenty of people who make money there too.

Furthermore, getting 10% returns yearly is not hard, you just have to have a good mix of preferred stocks and you hit that 10%.

Warren Buffet says to own 2-10 stocks at one time, but usually 5 or less. That's because you find gem company's that have competitive advantages and you can make real returns.

Do I care to wait 30 years in an index fund for everything to smooth out? No I don't.

You have your method and I have mine which is fine, but to say 99% of people can't invest on their own (just because you can't) is very discouraging to a young investor.

 

Yes, you can make millions. The question is what are the chances, and how much risk you're willing to take. My argument is not that you can't or that is impossible, but rather that you most likely will not, and will undertake more risk than you can handle in an attempt to do so.

There's a big difference between getting 10% returns, and easily and reliably getting them year after year with little work, as was your argument.


Warren Buffet's main argument for most investors is to invest in low-cost index funds: Link

Here's a more concrete quote from Buffet that talks about diversification and what he believes most 99% of the people should do (source):

Once again, you're not really reading what I'm saying. I did not say 99% cannot invest on their own, I said 99% should not cherry-pick stocks or daytrade. I right away told the OP to invest, just not in individual stocks but in low-cost index funds, on his own. I even cautioned against financial advisers who work on commission.

There are fundamental problems with your general argument:

1. You're trying to get rich. While everyone would like this idea, the realistic option for the vast majority is to acquire and build wealth throughout their life. The OP asked if he should start investing in mutual funds, not how he can become a millionaire next year. While there are a lot of people investing into individual securities, the majority, long-term, are losers. Maybe you'll be one of the chosen few, but the chances are overwhelmingly against you.

2. Investing is a game of risk and reward. You seem you ignore the risk part, and only focus on the reward. Yes, an index fund will never give you the same returns as a properly timed entry/exit into a hot stock. However, what is the risk associated with cherry-picking, especially for a regular investor? Risk is losing everything, but with a small chance of getting rich. What is the risk associated with sticking with low-cost index funds? 1:1 correlation with the respective market segments. You will do as well as the market, but you will never lose everything, save for world-wide catastrophe. The reward? You slowly build continuous sustainable wealth.

3. Risk is a very important idea to learn for a novice investor. If the OP invests all his savings into a few stocks as you seem to suggest, and a few of them go through big drops (even temporary), he might see large, and quick, double-digits losses. Will a new investor have the nerves and patience to see his investment grow back (if it will) without selling? Further, will he have the you-know-what to buy more as the stocks are plunging?

4. Even if you believe in your stock-picking abilities, can you honestly recommend that the OP, who never invested, should start picking individual stocks? Do you think he can fully analyze the balance sheets of companies? Do you think he intimately understands the industries and products of these companies? Do you think he knows the executive team inside and out? Do you think he will somehow get information not available to the general public, and thus not already priced into the stock? I don't see how you can argue against these points in the context of the OP of this thread, even if you personally want to stick with this strategy.

 

Very well written response and I would like to thank you for keeping this strictly discussion based, I do completely understand what you are saying and your point is correct, for a brand new investor I do not recommend buying individual stocks. I do recommend though that people learn the market so that one day they can start picking individual stocks to make superior returns.

I have invested since I've been 16, I have done well over my time of course making mistakes along the way. Currently the /ES has done very well for me, and I swing trade stocks. I do have some long term regional gem banks that have nice numbers in this market and trading at a huge discount to book and net tangible equity.

You clearly have shown that Buffett tells individuals to invest in index funds, and I can't argue that. But at the same time he didn't build his success doing that and he has said that low diversification has been key to his success. You're right I'm not looking to get "rich" per se, but I do concentrate on making solid returns that are above index funds.

The problem that many people have is they don't understand business models, income statements, balance sheets, and cash flow. Certain stocks become no brainers if you understand why and how they got their losses.

AGM I loaded the boat at $2.80 back when it crashed because they took huge losses on their preferred stock holdings in Fannie and Freddie, it wasn't their core business that was ruined. As soon as those writeoffs stopped and people saw they still had core earnings and very low non performing assets relative to their peer group, the stock rebounded in a big way. Something like this becomes a no brainer and that's why I think with the right patience, the right research, and being competent in how businesses work, there are golden opportunities in cherry picking stocks.

 

Now let's agree on something: do you think there's anything better for the OP right now, than to open a Roth IRA and start investing into a low-cost index-based target retirement fund? He will get a cheap, no maintenance diversified portfolio, and later, once it grows and he learns more about investing, he can make his own decision on how he wants to invest further and what stocks he does or does not want to buy.

If you agree, perhaps he will not go: as in his previous response

Edit for the OP: If you're interested, here's a fund you could consider: Vanguard Target Retirement 2050 Fund (VFIFX). For 0.2% in annual expenses, you get exposure to bonds, and domestic and international stocks (including emerging markets).

 

Roth IRA absolutely, but I still prefer something over a fund...realistically what will that fund return each year? There are some very safe preferred stocks out there with probably higher yields he may want to consider.

 

That fund will return anywhere from -X% to +Y% each year. As a small bit of advice I'd like to offer a quote by William Bernstein:

"First and foremost, risk and return are intimately related. You cannot earn high returns without bearing painful losses along the way. You cannot achieve perfect safety without condemning yourself to low, long-term results. The promise of high returns with low risk is a reliable indicator of fraud."

 

Money in mutual funds IS easily accessible, that's the beauty of mutual funds compared to many other types of investments, they're more liquid.

 

True, but don't forget a lot of them, especially those heavy/completely in equities, are volatile as well. So for emergency purposes, you don't want to have money tied to a stock-heavy fund that might take a big dive just as you need to withdraw.

 

Dmikon, your investment strategy is very similar to mine. My FA (fee-based and non-comissioned BTW) has been tempering the aggressiveness of my portfolio as I had a considerable percentage in emerging market and international funds. My IRA/pension is through Fidelity, my personal portfolio is through Vanguard. I've diversified into tax-managed capital appreciation and REIT equities.

Bottom line is I treat investing like fixed overhead. Every month I put the same amount into 3 Vanguard funds that is automatically deducted from my bank account, like rent for example. Of the 3 funds, 1 is tax-managed, 1 is index500, and 1 is mid-cap index. Every year, I cut a check for the maximum amount allowed for my 401K/safe harbor. I've already taken advantage of the Roth conversion earlier this year.

The proverbial truth is most doctors are too busy to be clocking the market and by virtue of being so busy seeing patients, end up not being the wisest investors. Diversification through index allocation is the strategy that works for me and allows me to stick to what I know and do best, treat patients.

 

Tyler, from working at a bank it makes me wish I had started saving when I was younger athlough I'm only 20 now. I see kids that are 13, 14 yaddi yaddi and even some younger that have anywhere from $300 to a few grand in a savings account depending on how wealthy the family is, of course lol BUT with that being said.. my father figure, if you will, told me when he was my age he had $25 automatically deducted from his payroll each pay period and deposited into a savings account. He pretty much forgot about the savings account since he never saw the $25.. I'd do the same but I look at my account everyday and my bank will not allow me to direct deposit funds to another institution. By me opening a savings account at my bank (where I work) I won't get any penalties for dipping into my savings all the time, which I did a lot when I banked at Regions. Anyway lol I need a little motivation, whether it be $20 a pay period or $100.. Wanna join me and start saving a little money? lol

 

I've been really bad about spending any money I get and not saving any of it. Work has been really slow recently and I'll be lucky to walk away with $30 in my pocket after a 9 hour shift.

Instead of taking $5 of that or whatever and putting it in savings, I've been spending it on food and gas. I've been trying to eat at home more often but it's easier said than done.

 

Cars do not help with that either. Next time you buy rims/intake/sub/whatever, think about how much you have to work for it and whether it would be better it invest it instead.

 

I've learned that lesson the hard way. I've been really good about not buying dumb shit I don't need recently, car related or not, it's just that food and gas costs add up quick. I need to start eating at home more often.

I'm not too happy with my job at the moment right now either. I'm not getting as many hours as I want therefore I'm not making much money. I'm giving my managers a month to get their shit together and if they don't, I'll be job searching once again.

 

This has been a painful thread to read... the OP has gone from a potential, budding investor, to a survivor on the money merry-go-round of life...in about 2 months...

Hey, OP... its all good man...I am over twice your age and only started getting really sound financial advice in the last 10 years...my brotha Rick was right when he said that we doctors are not great financial wizards... they don't even try to teach that to us along the way...

I am praying that things improve and all of the sound advice that is spot on, here in this thread will be a huge help to you one day soon!

 

Remember too, it's not so much about how much you make, but rather about how much you save. Who is wealthier: a person making $200,000 a year but spending $250,000 a year, or a person making $20,000 a year, but spending $15,000?

 

I am sure you thank God everyday for your parents (if not, start)... they are helping you keep your overhead low...my Dad used to make huge money, but he pretty much left me hanging when I was 17... so I ended up paying for college, my master's and med school myself...

... clean up your act now, and you can be making more, saving, investing and spending it right... and dmikon is correct about your cash flow... There are a bunch of broke millionaires!

 

I know man. It sucks

I appreciate the kind comments sir! I really hope things start to work in my favor so I can start saving for later down the road.

Like my girlfriend's parents always say, you have to pay yourself first. You save what you can and if you can afford to spend, then and only then, you spend.

Luckily my parents are very supportive. I've been making car payments since I first got car at 16, but with my income slacking, I've had to place that burden on them. I go to a local community college full time which they pay for as well. I pay for gas and all other expenses (food, etc). I hate relying on others for support, whether it be my parents or not. I'm ready to be out of school and start making some real money. I know I'm not going to be "ballin" out of college with a $100k job, but just about anything beats what I'm making now.

 

I really think this point in your life and especially in this economy, this has been a great reality check for you and it seems to me that youre well on your way to better dayz!
As a parent of a 22 y/o son, I can say that, I totally understand, and I am willing, like your parents, to support you while you get your education... when our son decided to quit college after 2 years, he was pretty much on his own at that point... so "ballin" to me is being able to take care of yourself within reason... and to stay running (not just standing) on your feet... this I believe you will do!

 

QFT. OP has learned the value of money, albeit the hard way. My old man was an MD just like Brotha Rick and I wasn't spoonfed. Having a paper route from grade school taught me the value of coin and working high school and college summers especially as a waiter scrambling for tip only solidified this value. These values instilled at a young age will remain with oneself for a lifetime, trust me.

 

It's been a reality check to say the least. I'll be at the mall and say to myself "damn I want that!", and earlier in life I would have bought it. Now I say "do I really need that? Is it worth the money?". It's probably a mix of maturity and also common sense that has hit me.

There's no way in hell I'm quitting school anytime soon. I need to get a degree (at least one) to make myself happy. Keeping my grades up and not giving up is most likely the main reason why my parents haven't given me the boot yet. It probably helps that I'm an only child as well. I think they are a little more willing to help me out rather than having two or more children to take care of.

Like you had earlier in your life, I'm currently working off of tips alone. As you know from the pictures posted in the "Interesting Cars at Work" thread, I'm a valet. Many people don't realize this, but we are just like a waiter or waitress at a restaurant. I make $2.13 an hour plus tips. I've walked away from a 9 hour shift with $10 in tips before. Sadly that happens more than it should.

I want to start saving and putting away my money, I truly do, but when I'm making what I'm currently making, it's hard. I'm not trying to make excuses and bitch about it either, I'm just frustrated. I'm not sure if I should start looking for another job or not.

 

You'll be a valet until a 100 to afford that lime green Gallardo For some reason I thought being a valet is more lucrative although my friend who is a valet is always broke. Just hang in there until a more lucrative opportunity comes along.

 

I wish I started investing earlier. I didnt start till i was 36 in 2009. At least I started at a decent time and with the 12 stocks i got i only have one loser which i hope will turn green next year. I educated myself, no help from no one. Everyone told me I was nuts and would loose everything in the stock market. Well F them im up 35% . Better than any bank.

 

Sorry I never saw your reply Rick!

My last day at the valet stand was last Sunday. It wasn't worth my time. I didn't feel appreciated and I felt taken advantage of. I proper two weeks notice and my boss was very understanding about it. I'm in the process of getting a new job and I hope it works out for the best!

Like you, my dad didn't start investing and saving until his mid-30s. I'm glad to hear your investments are doing well