In these times, you’re more likely to get rich slow, with a strategy you feel comfortable about, than by chasing the latest "can’t-miss" tips, writes MoneyShow.com editor-at-large Howard R. Gold.
On Monday, the S&P 500 index closed below 1,100, perhaps putting US investors through their second bear market in four years and their third in the past decade. Many global markets already are deep in bear-market territory.
- Read Howard’s commentary on the global bear market on MoneyShow.com.
It wasn’t supposed to be like this. Remember the 1990s, when empowered investors were told to “boot your broker”?
That was before the market booted us. And millions of baby boomers stand unprepared for retirement in a secular bear that doesn’t seem to end.
But unlike Jack Nicholson in A Few Good Men, I think you can handle the truth. So, here are five lessons I’ve learned from writing about markets and speaking to thousands of investors over the past decade.
1. Don’t Buy Most Individual Stocks
And by “most,” I mean nearly all.
Buying individual stocks is one of the worst ways people can invest in the market. Why? Because the vast majority of investors can’t assemble a diversified portfolio of individual stocks, and they stop following stocks closely just when they should be paying the most attention. Exhibit A: Netflix (NFLX).
And yet some publications, brokerage firms, Web sites, and pricey advisory services exist primarily to flog individual stocks—even though there’s little evidence people can beat the market with individual stock picks consistently over a long time. In fact, focusing on individual stocks is a pretty good recipe for lagging the market, studies show.
So, the only individual stocks I’d consider buying would be blue chips with a long history of raising dividends, and even then I would make sure you’re diversified geographically and by industry. I might follow some recommendations of a few people with verifiable long-term track records. And I wouldn’t keep more than 10% of your holdings in individual equities.
2. Don’t Buy Most Actively Managed Mutual Funds
Again, the vast majority of them are useless, in my view, which is why study after study shows only a small number can best the S&P over any extended period.
Certain advisors and services purport to help you pick winners—for a fee, of course. And you can, for a couple of years, if you’re lucky. But then once-hot managers who looked like the new Warren Buffett wilt like yesterday’s roses.
Remember Bill Miller of Legg Mason, who beat the S&P for 15 years in a row, only to stumble badly since? And now there’s Bruce Berkowitz of Fairholme Fund, one of Morningstar’s Fund Managers of the Decade, who has run into big trouble. (I own some Fairholme shares.)
Will he bounce back? Maybe. But should you wait around for him or the next “star” to burn out? No, as MarketWatch’s Chuck Jaffe wrote here.
Maybe even Peter Lynch, the legendary manager of Fidelity Magellan in its heyday, would have crashed and burned had he stayed longer than his 13 years at the helm. But he was smart, and got out at the top.
3. ETFs Are No Panacea, Either
To listen to the shills for the exchange traded fund industry, ETFs are the greatest thing since God gave Moses the Ten Commandments on Mount Sinai.
And ETFs have some very good features—lower fees and the ability to trade during the day (which can cut both ways, of course). Used properly, they can give you exposure to wide swaths of the market at a reasonable cost, making asset classes like commodities and currencies available to investors who always had to buy them indirectly.
Also, if you must “play” trends, ETFs are infinitely better than individual stocks for that purpose—with a small piece of your portfolio (never more than 5% to 10%).
NEXT: Beware of Toxic ETFs
|pagebreak|But as ETFs top $1 trillion in assets, the marketers have gone crazy, rolling out ridiculous products with no benefit for any reasonably sane investor. Even BlackRock, the world’s biggest ETF provider, sees things have gotten out of hand, and is calling for tougher safeguards.
Some ETFs, however, are downright toxic, like the many double- and triple-leveraged and inverse ETFs covering all kinds of markets. The SEC and others have warned investors away from them.
Everyone in the business I’ve interviewed on the subject says they’re for traders who hold them a day or so. Rubbish! Gullible, uninformed investors are scooping them up by the bucketful—witness the fiasco in silver back in April.
- Read Howard’s column on why silver fever was about to break on MoneyShow.com.
So, I’m going to tell you something they won’t: These ETFs have no reason to exist except to make money for their companies, and I would rather drink molten lead than put one of them in my portfolio, even for a “day trade.”
You shouldn’t either—ever. Which brings me to the next point.
4. You Don’t Have What it Takes to Be a Trader
One of the most pernicious ideas circulating recently has been the nostrum that “buy and hold” is dead, so investors must become traders—following experts’ paid advisory services and taking expensive trading courses, natch.
Yes, buy and hold really sucks. But what’s the alternative? Jumping from the frying pan into the radioactive Fukushima Daiichi nuclear plant?
Every professional trader I’ve ever interviewed has told me that traders and investors are different animals. And I assume the pros are making money at it, but they’re a tiny minority.
The best study on the subject, tracking millions of trades in Taiwan, showed only 1% of day traders beat the market. That’s right—1%!
So, stand before your mirror and say, I am not a trader, I am not a trader. Doesn’t that make you feel better?
5. Plan, and Lower Your Expectations
Sometimes in life, you just have to expect less. That’s the kind of period we’re in now in the markets, and by trying to make of it what it isn’t, you’re asking for trouble.
- Read Howard’s take on how politicians have wrecked the markets on The Independent Agenda.
So, you need a plan. Actually, you should have had one long ago, but get one now. Decide how much you will invest in equities, bonds, commodities, and cash, put them in broad-based index funds and ETFs, and then stick with your plan, adjusting your allocation as necessary.
But don’t listen to anyone who tells you to put 60% of your assets in stocks. Even academics are debunking that notion. These days, your fears are as big an enemy as the market itself, and you need to be comfortable with what you own.
Finally, when someone approaches you with a “can’t miss” tip or “infallible” trading system, ask them two questions: What’s in it for you? And why are you bringing it to me? If they can’t answer satisfactorily, walk away. If they can, do your homework first anyway.
The market is bad enough; you don’t need “experts” who are going to make it worse. Use common sense and look out for your interests.
And hang in there—it will get better. But I won’t lie to you and say I know when.
Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. Follow him on Twitter @howardrgold, read more commentary at www.howardrgold.com, and check out his political blog at www.independentagenda.com.