Where should beginners invest?
March 21, 2010
– Comments (35)
I've been asked a couple of times to manage someone else's money. I don't have the time right now, so the best I can do is suggest resources for learning how to invest or to suggest a couple funds to research. In my opinion, the know-nothing investor should buy a target retirement fund. Why? The know-nothing investor knows nothing about market irrationality, how to interpret financial statements or company filings, and much more. Should this person be investing in individual stocks? The answer should be a resounding "no."
I originally thought the best thing to recommend was a mix of the following:
1. S&P 500 or total market index fund
2. World market index fund
3. Small/mid cap exposure if S&P 500 was chosen in option 1
4. Real estate fund (VNQ/IYR)
5. A basket of commodities and/or metals
6. Treasury bonds, a total bond fund, or other fixed income investments
However, I quickly reasoned that the average investor would need someone to guide him through the process and to be told when to buy and sell. In essence, someone needs to manage his account. This isn't really what I was going for, so I decided that you could do a lot worse than the target retirement fund.
I essentially recommend dollar cost averaging into the target retirement fund until retirement. This takes out any notion of the beginner trying to time purchases and sales. Beginners really shouldn't be in the market without some heavy-duty research.
However, some people can't handle investing even after hours of research. Why? I believe investors need both the mind and the gut. The mind is easy; you read as much as you can and learn the right ways to research and evaluate companies. The hard part? The gut. Not everyone has it. You must be able to stomach whatever the market throws at you and make sound decisions most of the time (since nobody's perfect).
So there you have it. That's what I tell people to buy if they ask my advice. "Hands off" is the best possible approach. This person should not have to decide what percentage equities/bonds/real estate/commodities/cash. This person should also not be deciding how to rebalance and when to "get out" or "get in." Buy this freaking fund till you retire and that's it. THAT is the only investment approach that's dumbed down enough for anyone to follow.
If the person insists on an individual stock, I find myself recommending JNJ, PG, KO, CLX, etc. These are as close to risk-free as you'll get from equities.
Short of not being in the market at all, I believe the target retirement date funds will do sufficiently well compared to the alternative, which is beginners losing their shirts in the market because they don't know anything.