Thanks to all who submitted questions to our new financial advice column.
I am not an economist or a political pundit. I am going to resist the temptation to wander into areas where my opinions have little value. Like why Mattel apologized to China, the financial ramifications of the war with Iraq, the "fair tax" or how to save the social security system.
My goal is to deal with investment issues that are troubling you: How to invest intelligently so you can enjoy a decent standard of living, pay for your health care, educate your children and plan for your retirement.
In this inaugural column, I tried to select those questions that addressed these issues. I welcome your comments and suggestions.
If you have questions you want considered for future columns, please submit them as comments to this blog.
Question From Insignificance:
It's great that you're doing this, Dan. I wish you much success. Here is my stock market question:
After doing the research and finding quality companies to invest in, is it better to buy more shares of a lower-priced stock or fewer shares of a higher-priced stock? How should dividends be considered in this decision? Thanks!
This is an excellent question. It makes me feel like I am a passenger in a car you are driving at 80 miles an hour -- headed straight for the cliff. I want to grab the steering wheel, slam on the brakes, turn the car in the opposite direction and drive towards the sunset.
Do no research. Ignore the price of the stocks you are considering and ignore dividends. Don't assume quality stocks will always outperform the stocks of small companies. There is strong evidence to the contrary.
Stock picking is a losers game. Don't play it.
Heed the advice of Nobel Laureate Merton Miller:
" If there's 10,000 people looking at the stocks and trying to pick winners, one in 10,000 is going to score, by chance alone, a great coup, and that's all that's going on. It's a game, it's a chance operation, and people think they are doing something purposeful... but they're really not."
There is a better way. Don't try to pick stocks that will outperform other stocks. Own a small piece of all stocks -- over 16,000 companies, with gross revenues of $29 trillion, located in 192 countries. This is easy to do (unlike stock picking!).
Question From Ani:
Dan, in advance, thank you for your advice. There are many here who are money-smart and quite sophisticated in the subject.
I am, however, neither smart nor sophisticated when it comes to the financial world. I have a house, a bit of money in the stock market, and just enough money to be stupid.
Would you flag a sentence or two in your post for those of us who know nothing? You possibly have a group of folks here who need to learn from the ground up -- like me.
Please talk to us using simple, straightforward language. In my case, you can assume you're talking to a two-year-old, so explaining terms and meanings in a way a beginner would understand would be terrific. That would help those of us who are maybe mathematically challenged, yet eager as heck to learn.
Looking forward to attending class
I know that I should not play favorites, but your question really appealed to me.
"Smart Investing" is not complicated. It is made to appear so by an industry that has an economic interest in convincing you that you need their services.
For most investors, here is all you have to know:
Take three buckets.
* Color one red. Call it the bond bucket.
* Color one green. Call it the domestic stock bucket.
* Color one blue. Call it the foreign stock bucket.
Let's assume you have $10,000 to invest.
* Take $4000 (40% of the $10,000). Put it in the red, "bond bucket".
* Split the remaining $6000 as follows:
-Put $4200 (70%) in the green, "domestic stock" bucket;
-Put $1800 (30%) in the blue, "foreign stock" bucket.
Go to the web page of Vanguard or call Vanguard at 877-662-7447.
* Invest the $4000 in the red, "bond bucket" in the Vanguard Total Bond Index Fund (VBMFX);
* Invest the $4200 in the green, "domestic stock" bucket in the Vanguard Total Stock Market Index Fund (VTSMX);
* Invest the $1800 in the blue, "foreign stock" bucket in the Vanguard Total International Stock Index Fund (VGTSX).
Every six months, call Vanguard customer service. Tell them the following:
"I want to rebalance my portfolio to keep these percentages intact."
That is all most Americans need to know about investing.
Based on long term historical data, this simple formula would have placed you in the top 5% of all professionally managed money. The annualized returns were almost 300% higher than the average returns achieved by mutual fund investors who relied on the advice of their brokers or financial advisors.
This asset allocation is suitable for many, but certainly not all, investors. You can take an asset allocation questionnaire to determine the right asset allocation for you by going to: www.smartestinvestmentbook.com.
If you want to delve deeper, check out my blog entitled: It's So Easy, Your Broker Could Do It.
I have no association with Vanguard (unfortunately!).
Question From Kranky:
Not really a question, because I reason that the US economy is already, unalterably headed in this direction; but, what can an individual do with stagflation? :Rising interest rates, inflation
along with recession.
Maybe the best investment advice in that situation would to be to move to a more stable country, or buy a lot of survivalist food and guns.
You are trying to predict the unpredictable.
Instead, you should be focusing on your asset allocation and buying a globally diversified portfolio of low cost index funds for the stock and bond portions of your portfolio.
Question From Eahce:
How do gold and silver coins look now?
Wall Street is littered with the bodies of those who believed they could predict which asset class would outperform other asset classes.
You need to own all asset classes, in an allocation appropriate for your investment objectives and tolerance for risk.
Question From freshpavement:
Despite many reports to the contrary, some of us have managed to live beneath our means and develop substantial savings in the past decade. With the US Dollar declining, the value of those savings diminishes.
Is it a good idea right now to change some of those saved US Dollars into a stronger, more stable foreign currency? Which foreign currency looks like a good buy? How does one go about doing something like this?
I have a fairly simplistic view of the foreign currency issue:
1. I agree with Alan Greenspan, who stated that efforts to predict currency movements have "a success rate no better than that of forecasting the outcome of a coin toss."
2. I don't understand why I should be terribly concerned about foreign currency prices since I intend to reside in this country. I am far more concerned about the ability to keep pace with inflation here, so that I can enjoy a comfortable quality of life.
3. I manage my asset allocation so that 30% of my stock holdings are in international stocks (using a low cost, international index fund) which provides me with all the currency diversification I need.
See you next week. Please keep those great questions coming in!
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.
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