Don’t Put Your Eggs In One Basket
A Lesson About Stocks
The Investing Series, based on my book, Invest Like a Pro, continues! If you’re just joining us, you can catch up on YouTube.
This week we’re looking at stocks. They go up. They go down. And sometimes? They stay the same…
What Is a Stock?
A stock is simply ownership in a public company. No more, no less. When you buy stock, you become a part-owner of that company. The value of that stock will fluctuate based on demand. What are people in the market willing to pay for the stock? That’s its value.
You could buy stock from just one company. Last year, we bought our son, Porter, $100 of Apple stock to teach him about how stock values fluctuate. A year later, the stock is at $155. Lesson not learned. But, if it had gone down, his investment portfolio—a single stock in Apple—would be greatly affected. This is a classic “Don’t put your eggs in one basket.” situation. You want to hold a variety of stocks, and here are just a few of the ways to do that …
When you invest in a mutual fund, you’re buying into a diversified collection of underlying assets, also known as a portfolio. Portfolio managers have one job, and that is to grow the fund as big as possible. There are two ways to do that: attract new investors (like, you) or experience an increase in the value of the underlying assets (the stock values of the companies in the portfolio go up).
As a managed investment, mutual funds incur management fees. You want to avoid fees, which will lessen your return on investment. (See our post about rate of return for more information about fees.)
I don’t recommend mutual funds. There are cheaper options that allow you to invest your money in, essentially, the same way—and without the stress of trying to guess which mutual fund will outperform the market. Remember, focus on what you can control, and research shows that you’ll do better than 70% of investors!
Index funds are typically much less expensive than mutual funds. They’re called passive funds because they track the ups and downs of the index, without being actively managed by portfolio managers.
There are several indexes to choose from, including the Dow Jones, S&P 500, Russell 2000 and NASDAQ. You can even find index funds that hold stocks from every, single company available on the U.S. Stock Exchange—with a single click, you can buy a share and be invested in every stock on the market!
Exchange Traded Funds
An even cheaper way to invest is exchange traded funds (ETFs). They cost fractions of a percent, on a per-transaction basis, so just keep an eye on the fees. If you buy enough shares, and don’t sell, the fee is negligible.
The Bottom Line?
If you’re like me, and you don’t want to spend your life managing your investments (which could easily be a full-time job!), accept the market average. Over the long term, we’re banking on economic growth and a climbing market. Invest as cheaply as possible—index funds and ETFs are great options—and be well-diversified.
If you want to dig further into the information we’ve covered, I highly recommend The Little Book of Common Sense Investing and keep focusing on what you can control!
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