If you’ve maxed out your 401(k), have a fully funded emergency account, and are prepared for bigger, upcoming purchases, you may want to consider investing in the stock market.
After all, there are several compelling reasons to invest in stocks, financial journalist Andrew Tobias explains in the updated version of his 1978 investing classic, “The Only Investment Guide You’ll Ever Need.” “Unlike bonds, stocks offer at least the potential of keeping up with inflation,” he writes, and, “Over the long run — and it may be a very long run — stocks will outperform ‘safer’ investments,” such as bonds, CDs, and money-market accounts.
That being said, investing is always a risk. If you decide to go this route, consider “the most sensible way for most people to invest in stocks,” as summed up by Tobias in the 10 points below:
Little, if anything, is guaranteed when it comes to investing.
You could earn money or lose it, so if you'll need quick access to liquid cash in the short term, you probably won't want to invest.
'Only invest money you won't have to touch for many years,' Tobias emphasises. 'If you don't have money like that, don't buy stocks. People who buy stocks when they get bonuses and sell them when the roof starts to leak are entrusting their investment decisions to their roofs.'
People have a tendency to 'shun the market when it's getting drubbed and venture back only after it has recovered,' Tobias explains.
However, 'It is precisely when the market looks worst that the opportunities are best; precisely when things are good again that the opportunities are slimmest and the risks greatest.'
In short: Don't get overly excited when the market is judged to be healthy, and remember that bad things aren't obvious when times are good. As legendary investor Warren Buffett likes to say, 'You only find out who is swimming naked when the tide goes out.'
Rather than rushing to buy hundreds of shares when you're convinced the stock is going to take off, invest a portion of your paycheck in the market each month, Tobias recommends.
'Diversify over time by not investing all at once,' he says. 'Spread your investments out to smooth the peaks and valleys of the market. A lifetime of periodic investments -- adding to your investment fund $100 a month or $750 a month or whatever you can comfortably afford -- is the ticket to financial security.'
'By and large, for your long-term money, 'buy and hold' is the way to go,'' Tobias emphasises.
As Warren Buffett says, 'If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.'
Forever is a good holding period. After all, Buffett has held his stock in GEICO since the 1950s, Tobias notes.
Putting all of your money in one place is asking for trouble. 'If all your money is riding on two or three stocks, you are exposed to far more risk than if you've diversified over 20 or 30,' Tobias writes.
Think about it: 20 or 30 companies simultaneously failing is pretty unlikely.
He also points out much of the market's gain has come from a small number of 'big winners,' such as Microsoft and Intel: 'So you could attempt to find these stocks to the exclusion of the rest of the market ... but probably miss them. Or you could be content to buy very broad index funds that, while they will perform only 'average,' will almost surely include these great stocks in their average.'
Investing gets emotional. Oftentimes, our choices are clouded by fear, greed, and nervousness — and it doesn't help that you can see how you're doing throughout the day.
Avoid the temptation to check a stock ticker or your account on a daily or weekly basis. Markets go up and down every day, and so do individual stocks, 'but that doesn't mean there is significance to every move,' Tobias warns.
Plus, the more you trade, the more you underperform, Buffett says: 'For investors as a whole, returns decrease as motion increases.'
'Beware high-fliers and the stocks that 'everyone' likes, even though they may be the stocks of outstanding companies,' Tobias warns. 'Even if the growth comes in on schedule, the stocks may not go up. They're already up. Should earnings not continue to grow as expected, such stocks can collapse, even though the underlying company may remain sound.'
Plus, it's unlikely that these stocks have been ignored and are 'hidden gems' Wall Street has failed to discover, he notes.
'The more-expensive investor newsletters and computer services only make sense for investors with lots of money — if then,' Tobias says. 'Besides their cost, there is the problem that they are liable to tempt you into buying, and scare you into selling, much too often.'
Plus, 'Half the experts, at any given time, are likely to be wrong,' he says.
There are plenty of free, online resources that you're better off tapping into. Tobias recommends Yahoo Finance to learn more about publicly traded companies (you can look at annual reports, charts of performance, and earnings estimates) and Morningstar to learn about mutual funds and investing in general.
'It's one thing to take risks in low-priced stocks you hope, over time, may solve their problems and quintuple in value. ... But it's quite another thing to jump in and out of stocks (or options or futures) hoping to 'play the market' successfully,' Tobias writes.
Keep it simple, he emphasises: 'Buy value and hold it. Don't switch in and out. Don't try to outsmart the market.'
'The bottom line is that most people should do their stock-market investing through no-load index funds — mutual funds that don't attempt to actively pick the best stocks, but just passively invest in all the stocks in the index they are designed to match,' Tobias writes.
You won't be hitting any grand slams by investing in low-cost index funds, but you also won't lose money rapidly or dramatically.
Plus, Warren Buffett, his right-hand man Charlie Munger, and Vanguard founder John C. Bogle are all big advocates of the index fund.