Of late I have been reflecting on my investing performance over the last decade. While I have made some money on “winning” stocks, I have probably lost much more on duds. In fact as I looked at my portfolio I still own many of these dud stocks, hoping for some miraculous bounce that will restore their value. Or as I tell myself to feel a little better about the losses incurred, at least I can eventually write them off as a capital loss and reduce my taxes. Really not a very good reason. And then this article, “Are You an Investor or Speculator” really crystallized that I am more of a glorified speculator rather than a mediocre investor. In fact, if I had invested all my money in index funds and done no stock specific investing, even given the 2008 financial crisis, I would still be better off. Sadly it has taken me 10+ years to get to this realization.
…Many casual investors buy stocks and assume they are investing, but in reality, they are actually speculating. True investing entails conducting a thorough analysis of a company, determining whether the current price is justified, deciding whether the stock would be a good addition to your portfolio, and repeating the process periodically; speculation is simply buying a stock because you think it’s a good company or you heard a good tip, but you really don’t know how the company makes money, who its competitors are, or in some cases, even what it does. Most people would say they are an investor, but unless you are employing the fundamental analysis discussed below, you may actually be a speculator… [and] the analysis doesn’t stop when you buy the stock, you must continue to monitor the company (not just the stock price) to ensure it still meets your criteria. It’s okay to invest in stocks, but investors must recognize that unless they conduct ongoing and thorough analysis, they are merely gambling/speculating….
Now I do enjoying “investing” in certain hot stocks, but I have come to accept that really this is just no more than an educated gamble. I rarely do a detailed top-down or bottom-up financial analysis of the company and the industry and like most amateur investors, I tend to find selling a losing stock very hard. So I am slowly coming to the realization, coupled with the finance courses I took in my recently completed MBA program, that regularly investing (dollar cost averaging) in low cost index funds is probably the smartest strategy for me. It maybe boring, but over the long term research and my own analysis has shown I would have been much better off.
So where and how to invest? Generally speaking most research points to an asset allocation mix of 40% domestic, 40% international and 20% bonds. Now this mix is really up to you and is based on your risk profile. As someone in their mid-thirties, I feel US stocks have more upside over the next 5 years and that the bond market is going to offer little upside after it’s 20 year bull run. So my planned asset allocation (which I try and mirror in my 401k/IRA investments) is 50% US, 40% international and 10 % bonds (of which half I would like in TIPS).
The good news is that you can easily find three to four funds to achieve the above allocation mix. As always go with the fund managers that have the lowest fees, because over the long term fees and expenses can significantly eat into your returns. A quick scan of Morningstar‘s investment research fund screener shows that Vanguard and Fidelity generally offer the lowest cost funds. Since I already have a Vanguard account (no commercial affiliation) I used their fund offering to setup my monthly investment plan. I chose the following mix:
- Total Stock Market Index Fund (VTSMX) - provides exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks
- Total International Stock Index Fund (VGTSX) - provides exposure to both developed and emerging international economies. The fund tracks stock markets all over the globe, with the exception of the United States
- Total Bond Market Index Fund (VBMFX) - invests about 30% in corporate bonds and 70% in U.S. government bonds of all maturities. I am using my 401k account to invest in a TIPS fund as I could not find a suitable low cost post-tax fund at Vanguard.
So like my retirement accounts, my after-tax investing strategy is also passive. I will review and re balance (if needed) on a quarterly basis, but will not be taking an overly active role as I did with the stocks I held. I’ll keep a little bit of money to invest (gamble) in some stocks, because I enjoy it, but realize that my the bulk of my investing is now in the hands of the market and professional fund managers.