I'm an apostle of the no-frills, low-cost indexing investment plan. Unless you have a desire to get very involved with your investments, put your long-term money in some mix of a US stock indexed fund, an international equity indexed fund and an indexed bond fund. Decide on an allocation and then reallocate back to your original plan every year or two. The best results come by putting anything you don't need for the next ten years into equities. If you can't handle the swings, allocate more into fixed income until you can sleep at night. And yes, you may need to talk to someone once in a while but proceed here with caution.
That's mostly it. With a little emotional control, an average person can retire with a lot of money just reaping the wonders of modern capitalism.
If you seek some additional adventure with your investments, indexes provide a lot of options. In general, riskier investments pay off more so buying into emerging markets, small caps and higher risk bonds, such as corporate and international can all help you improve your returns and sometimes stabilize your portfolio. It all takes additional work, though, and it is rarely worth the cost of a high-priced advisor.
The only warning is to stay away from actively managed funds. They are a black hole of costs, losses and frustrations. You have a better chance of picking an outperforming stock than an outperforming fund. Their fee and turn headwinds are just too much for even brilliant people to overcome.
For me, though, I've never been able to get past one fundamental problem with indexed funds. In order to keep turn and costs low, they own equities by their capitalization. It is good logic, but it also means they are buying disproportionately more into overpriced equities (however that is defined) and disproportionately less into underpriced equities. Buy low, sell high would tell me to do the opposite of what indexes do by their nature. I have maintained that with a good dose of emotional control and a clear look at some companies, it is not that difficult to identify miss-priced stocks and outperform the indexes.
So over ten years ago, I started buying individual stocks. I still keep the majority of my equities in indexed ETFs but I have a significant investment in numerous companies in both the US and around the world. I assumed that with some work and following some key metrics, I could easily beat the market.
Here's what happened. For the first several years, my individual stocks (including internationals), beat the S&P 500 quite significantly and I felt pretty justified (all figures include dividends). But then the horrible years of overseas returns arrived and most of my gains were wiped out. And now after ten years, I have realized that it is not easy to outperform the indexes over the long haul. I have spent considerable time trying to analyze my stock returns and quite bluntly, I do not know if I am beating the S&P 500. For starters, Quicken gives me enough conflicting reporting information to question anything. Although I crushed the S&P 500 last year, it is true that over the past ten years, I would have done better in an S&P 500 fund. But that also comes after a stunning US bull market, a trend that will hardly continue indefinitely.
Charles Schwab, where I have most of my money, has some performance analysis tools. They suggest that all of my investments (stocks, bonds and funds) may somewhat outperform their benchmarks but at an outsized risk.
I have been able to see some great opportunities. I bought Ford at $2.71 and sold it less than two years later for six times that. But I also lost everything I spent on Peabody Coal, one of my "no-brainer" purchases.
Research suggests that individuals can't succeed picking stocks because most of gains come from just a few stocks. But my look at over 100 stocks that I have owned does not support this thesis. If I ignore the extremes, the middle stocks do about the same as the total. That is, the good and bad is widely spread.
If I look at the averages of annual returns over ten years, all of my equities (including stocks and funds) have lagged the S&P 500 by about two percentage points, largely because of my heavy foreign investments. My stocks have done slightly better than my funds but not as well as the S&P 500. One not surprising find is that the standard deviation of annual returns is considerably higher for my stocks than for the S&P 500.
Over these years, I've separately tracked the stocks I've sold to see how they went on to do after I left them. Some went bankrupt but many did outstandingly well, including Advanced Energy Industries (AEIS) that has gone up eight times since I sold it. There is not strong evidence that my sales were good calls.
So I'm back where I started. Your safest, easiest and smoothest route to retirement is with low-cost indexes broadly invested. But for those who seek some adventure and the real possibility of a significant windfall, you can purchase individual stocks and with some work, you are in no more danger than many other investment venues. If you buy individual stocks, here are my tips.
First, realize that this is work. Do not invest in anything - stock, bond, fund, property - that you do not understand. For stocks, that means an ability to follow the basic financials of a company and to have some familiarity with their business. The easiest way to get this is from their SEC reports (usually 10-K). I stay close with their numbers. For me, losses, poor cash flow, high debt, no dividend and high prices are troubling signs. And don't be afraid to look at many equities. The broader your search, the better chance you have of finding a win.
Recognize that humans are terrible forecasters, including you, advisors and other experts. Do not rely on your gut feelings and other emotions, company marketing materials, IPOs, hot tips, buy/sell recommendations or forward earnings. Develop some sort of rational process for selecting one stock over another using a broad set of facts, and then stick with it. Review your stocks occasionally to see if your original logic holds, and if it does not, consider selling it. Do not respond to the ongoing market noise or swings in prices. And remember that a lot of money is lost both holding a dying stock too long and selling a rising stock too early. My crime with Peabody was to buy into it two more times on its way into bankruptcy.
Spread your equities across market capitalizations, sectors and even countries. Establish some limits to keep yourself from overexposure to an individual stock or sector. This will help stabilize a portfolio.
Finally, only buy a stock because you financially value it as an organization. Do not day trade or buy stocks (or funds) because of market timing or technical analysis. These are zero sum games that will probably be losing bets. Buy a stock only as an investment that you may keep for years.
I plan to continue owning individual stocks. Today, I'm uncomfortable with the US market and expect internationals to continue to outperform the US. I'm especially bothered by the indexed US funds because a few large firms seem to be overpriced. But, my concerns aside, I know that I'm a terrible forecaster and market timing is a bad policy. So I will sit and watch. For another ten years.