Throw Darts at the Paper to Pick Stocks

dartsWhen it comes to investing your hard earned money many people agonize over what investments to pick. I’m reminded of an old joke investment advisors used to tell clients. When markets are way down such as during a recession you could take the stock listings from a newspaper and throw darts at the paper to pick stocks. Inevitably when the market recovers those randomly picked stocks would go up in value.

Smart Sales Tactic

It’s a smart sales tactic used to convince investors that a huge recovery is always looming and it’s always a good time to buy. If only it were that easy. Simply buying investments randomly may work in the short term, but you need to put more thought into successful long term investing. It has gotten more complicated these days. Why?

Unfortunately, the ease of investing through investment accounts linked directly to your bank account makes choosing investments more difficult. Not only do you have thousands of individual stocks to choose from, there are also currently thousands of funds out there. These funds include mutual funds, exchange traded funds, funds of funds, specialty funds, bond funds, internationals funds, emerging market funds etc. etc. How can one even decide when there are so many options?

Here are my thoughts on how to choose wisely:

Individual stocks may seem like the logical choice, but you greatly limit your diversification. Companies can experience negative events, get caught in cycles, and sometimes even go bankrupt.

Risk vs Reward

Risk-averse people will lean towards very safe investments such as bonds, or even a fund that holds multiple bonds. It’s very safe, but you sacrifice on your return and will barely keep pace with inflation. It’s a poor way to save for retirement and personally I don’t want to invest to break even with inflation.

To increase your return you need to accept some risk which means holding both stocks and bonds. You will also want to have holdings covering multiple sectors (these sectors include healthcare, materials, real estate, consumer staples, consumer discretionary, utilities, energy, industrials, consumer services, financials, and technology).

Own Some of Everything!

Owning a piece of every market sector allows you to minimize losses when a sector is down and gain on hot sectors. By owning a piece of every sector, your aim is to be approximately right all the time.

Investing isn’t limited to your home country. There’s a global market out there, and having international holdings adds diversification to your investments.

Fees for All or Not at All

Lastly, since it’s impossible to beat the average return of the market over the long term, stop paying for this service. Far too many people are still paying fees of 2-3% for actively managed funds that deliver mediocre performance. Passive funds such as exchange traded funds typically charge fees of 0.2% which gives you an immediate advantage of over 2% in fee reductions over actively manage funds. That percentage makes a huge difference in the long term. For more information on these types of investments please refer to my post “Invest Made as Easy As One Two Three”.

Investing safely for the long term is no easy task and unfortunately having a dizzying amount of investment choices often leads to bad choices.

Throwing darts and picking investments randomly is a losing investing strategy.

Water BarrelThe BalanceIn my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.

As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.

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