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| Warren Buffett taught us all what we should have known from the start: that index funds rule. |
Thanks to Warren Buffett, investing in index funds has become the first choice for most small investors. It's good advice. I'm not arguing with Mr. Buffett over where to your money. But if you don't have much money to invest, waiting for index funds to grow can be painful. That's why so many investors continue to "play the market". Here are my thoughts on what this means for us little guys.
My stock portfolio isn't nearly large enough. I've invested thousands of dollars across the past ten years. I've lost more money in the stock market than I've made. And I have tried every conservative strategy I have read about. The problem for me is that no matter where I put my money something causes the market to drop and then my values hit the skids.
I know conventional wisdom is to hold an investment for at least 5 years. That gives it time to recover from one, two, maybe even three drops. I've been lucky like that a few times. But when it comes to picking good sectors for mutual funds, I haven't always done well.
Those big index funds are expensive. I like to buy whole shares of small stocks and funds and watch them grow in value. Maybe that's the wrong habit but it worked for me when I first began investing.
Failing isn't a sign that you're doing anything wrong. The Motley Fool ran this article about Jeff Bezos' Fire Phone failure. He has more money than I ever will. If someone like Bezos or Buffett can lose millions of dollars on an investment idea, I figure I can afford to lose hundreds of dollars every now and then. But I need some winners to pick me up, too.
At the beginning of the year Fortune ran this article that said "the index fund has won". Index funds, also called Exchange Traded Funds, are supposedly cheaper than other mutual funds because they are run by computer. There is no expensive fund manager picking the stocks in the fund, so you incur lower administrative costs. These lower costs are passed on to investors.
But when the index that an ETF follows suffers a crisis then the ETF suffers a crisis, too. Meanwhile as millions of small investors like you and me pile into these funds their share prices go up. They keep investing that money into the same stocks, over and over, driving up the prices of those stocks. So now it's more expensive to invest in an index fund than in individual stocks.
You would think the funds would drive their own share prices down with a split. That would be great for investors. But the ETFs don't split their shares very often. In July Direxion announced 9 ETF share splits. Four of those splits were reverse share splits, which mean the outstanding shares were folded into a smaller number of shares. That's never good for small investors because it drives up the price of a security. If the price remains high small investors won't be able to buy into the security. If the price drops then that means the company or fund is in trouble and investors are losing value.
Investment experts are always arguing about the best way to manage a stock portfolio. Thousands of books have been published on the subject. I'll never read them all. I won't read all the daily columns from investment bloggers either.
There's always someone who says something worth reading. I found this article on Fortune that reviews a new investment book called Heads I Win, Tails I Win. I liked the title. The author is Spencer Jakab and he pokes holes at traditional investment strategy. He takes a more conservative approach. Rather than rushing after opportunities, he says, we should be waiting for market drops to rebalance our portfolios and building upward. Always build upward.
People will continue arguing about the best ways to invest in the stock market. And there will always be people who never invest in stocks. I think index fund investing is still a smart move. You have to watch for good opportunities in those fund and then practice a consistent "buy and hold" strategy. Any investment that grows fast overnight is too volatile for me. I've been there and seen the carnage. I was the carnage.
I'm not Warren Buffett or Jeff Bezos. I can't really afford to lose a lot of money on stocks. The best investments I've made so far have been the ones I left alone for several years. I wish I had done that with them all.
