Stock Market

[Schneed10]

I'm not a broker, but I studied investments on my way to grabbing my MBA. I'm of the academic approach: it's virtually impossible to beat the market.

The S&P 500 (the biggest 500 companies in the US) historically returns around 10% per year. You can put your money in Vanguard or Fidelity's S&P 500 fund, and if you keep your money there for 10 years or more, you've got a great shot at earning 10% per year. You can certainly put together a stock portfolio that can beat 10% over the course of a year, or maybe even three years. But if you're investing for the long haul, like an 18-year old should be, it becomes very difficult to top 10% per year for 10 years or more.

The reason is simple. There are some very talented stock pickers out there, guys who can beat the market. Some are brokers, some are mutual fund managers. Brokers typically charge you 3% or so for their services. Think about that. In order for them to give you more than the S&P 500 can, they have to gain more than 13% per year. One year they might gain 25%, the next year maybe 15%, but then the next year they'll lose 20%. Net of their fees, it's incredibly hard.

My advice: steer clear of brokers at all costs. You pay a much lower expense rate by investing in a Vanguard or Fidelity mutual fund. These two fund companies have the lowest expense ratios in the business. Fidelity has a few stud fund managers, specifically William Danoff who runs the Fidelity Contrafund. He is one of only 7 or 8 managers in the world to beat the S&P 500 for 10 years in a row, even after factoring in his fees. However, the Contrafund this year is going to end it's streak, Danoff is not going to beat the S&P 500 this year, proving that even the best can't do it year in and year out. Same with Bill Miller of Legg Mason Value Trust fund, he is widely considered one of the best stock pickers out there, he has beaten the S&P 500 for many years in a row, but this year he won't.

If you want to make the most out of your investments, make an S&P 500 index fund the core of your portfolio. Expense ratios at Fidelity and Vanguard are below 0.2%. That's pretty favorable compared to a broker who will charge 3%. Then if you wish, mix in some more aggressive stock funds, like the Fidelity Contrafund or the Fidelity International Discovery fund, which invests in developing markets and is on fire right now.

Just realize that the more aggressive your investments, the more prone you are to seeing your money go on a rollercoaster ride. Don't invest aggressively unless you can sock away your money for at least 10 years. If you need it before that, you should be in bonds and money market accounts.