Is the individual investor better off sticking with mutual funds or exchange traded funds rather than trying to pick individual stocks?
Different people answer this age-old question many ways. Some will tell you that it is impossible for individual investors to succeed in picking stocks when many professional mutual fund managers do not seem to be able to consistently do the same thing.
At the other extreme you'll find any number of people who are willing to sell you a system that will virtually pick the stocks for you and promise great success with your investments in the stock market.
I fall somewhere in the middle of these two arguments. I do believe individuals can pick stocks that will be successful over the long term if they follow some simple rules and are willing to do their homework.
I do not believe most people, in fact the vast majority of people, can trade stocks successfully for any length of time before they will suffer substantial losses.
There are some people making money trading stocks and they will happily point out their success if you ask or even if you don't ask.
However, most investors do not have the time or the risk tolerance to trade stocks and succeed. I'm not talking about the occasional dabble where a minimal amount of money is at risk, but rather those people who invest substantial sums on a very regular basis and may in fact do this as a full-time job.
If you are willing to take a long-term view of investing in the stock market and forget about initial public offerings, hot tips from your neighbor or any other traps that investors fall into, I believe you can pick stocks that will help build wealth over the long term.
This is not something you do one evening after a couple of glasses of wine and decide you're going to be an investor. It takes a significant amount of work and a good understanding of your tolerance for risk.
For most people getting started investing in individual stocks, I would recommend putting 75% to 80% of your investors will assess in a couple of good low-cost stock and bond index funds and starting with the remaining money you have for investing in individual stocks.
Take your time and learn about investing in individual stocks. Do not invest all of your capital until you have some experience identifying great companies and determining great prices. It makes sense for most people to keep some of their money in index mutual funds or exchange traded funds. This will give you a certain amount of diversification that owning just a few stocks will not provide.
Many investors find investing in bonds particularly tricky. If you want to invest in any thing beyond U.S. Treasuries, a good bond broker or a bond index fund is your best bet.
Learning to find great companies to invest in takes time and patience. There will be periods during the stock market's regular cycles when the long-term investor should just sit by and let the drama play out - when the market is way over-priced.
The key to investing in individual stocks for the long term is buying great companies at great prices, which means you need to identify a great company and you need to identify the great price.
This may mean you don't buy that great company for many months until the price is where you think it should be so you can make a profit over the long term.
If you do not have the patience to find great companies and wait for great prices, you'll probably not succeed in investing in individual stocks over the long term.
However, if you're willing to do the work you can have all or some of your money invested in individual stocks.