Interesting Thoughts And A Plan of Action For You

Sometimes you actually learn something in guest spots. In all of business television, there are only a few shows worth watching. The rest is hot air, or so boring you can’t stay awake. Joe Kernan runs a great show, Squawk Box, on CNBC. I miss Carl Quintanilla on that show.

This morning, one guest made this statement (paraphrasing): In the last twenty years, America has seen two things. First, it’s seen the rise of technology that has made us more productive than ever and continues to develop to make our lives more useful. Two, we have seen the rise of a world wide middle class consumer that wants to be like us.

The guest couldn’t understand why people were invested in cash at 0% interest when the S&P ($ES_F, $SPY) seemed way undervalued to him.

I feel their fear. But I agree with him. You should be jumping into the market with both feet if your time horizon is ten years or more. It is truly an amazing, exciting time to be alive.

However, you must look before you leap.

Most people are uncomfortable with picking a single stock. Or, they are baffled by the volume of research out there on the stock market. It paralyzes them. Makes them feel unworthy and less confident. Because it’s their money, there is a lot on the line.

Follow an expert and put your fears away. Here is how.

Don’t use a money manager. Follow Gene Fama. Brokers will disagree with me. But, the long term statistics are in my favor. Even Warren Buffett agrees with me.

Pick a no load mutual fund that replicates the S&P 500 index. Put your money in there and forget about it. Add some money monthly. If you want, spread your risk around and buy a similar no load index that tracks Asia, South America, Europe, and Africa. This gives you worldwide exposure to growing economies. Growing economies should be more volatile, and that volatility increases your risk (what the pros call beta) slightly. You will be fine.

No one can beat the market. They can beat it for short periods of time, but not consistently. If anything has been taught through this financial crisis, it’s that Efficient Market Theory works. You would have been better off in the S&P, riding it down then up, than trying to pick a single stock or small basket of stocks to whether the storm.

20/20 hindsight will tell you that you might have been able to pick the correct stocks, but very few people did. The average investor should just put their money in a no load fund. They will be better off in the long run.

UPDATE

I should also add that with all the high frequency trading going on in the market, you will never be faster than a computer. HFT creates a lot of noise. Following the efficient market hypothesis gives you a great strategy to ignore all the noise, and make the HFT guys work for you.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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