The majority of people do not have the time and motivation to conduct the in-depth research to confidently pick individual stocks in companies that will make them Financially Independent. We would need to know if a stock is undervalued or overvalued, how it compares to competitors in the sector, the condition of that sector in the current economic cycle, and several other telltale signs that must be in alignment to indicate a screaming buy. Even if a person had the resources available to attempt this endeavor, chances are they would be less successful than if they simply invested assertively in a low-cost broad market index fund. This lesson focuses on why it is important to consider using passively managed investment vehicles to do the bulk of the heavy lifting in the stocks portion of your Financial Independence portfolio.
Read: Stocks — Part V: Keeping it simple, considerations and tools by JL Collins of jlcollinsnh.com
Read: WHY MOST PEOPLE LOSE MONEY IN THE STOCK MARKET by Wanderer of millennial-revolution.com
Watch: Rule #6: Use Index Funds and Passive Investing (video) by Rick Van Ness of financinglife.org
Listen: The Stupidest Thing You Can Do With Your Money by Stephen J. Dubner of freakonomics.com
Read: How a 1% Fee Could Cost Millennials $590,000 in Retirement Savings by Dayana Yochim and Jonathan Todd of nerdwallet.com
Take Action: Considering the information discovered in this lesson, review your investment holdings and understand the true cost of their fees over time as compared to that of a low-cost broad market index fund. Determine if you feel you would be better served with the majority (if not all) of your holdings in passively managed index investments. Do only what you feel comfortable based on your level of understanding and willingness to make the change.
In the Financial Independence Community, most consider JL Collins’ approach to investing in stocks the benchmark route. If you want an approach that may be slightly less simple, look into the 2 Funds for Life strategy by Paul Merriman. He, too, believes investing should be easy to implement and he proposes his 2 Funds for Life strategy can perform slightly better. Remember, regardless of what approach you take, continue to justify your approach based on your own research and life circumstance.
Read: My Thoughts on Small-Cap and Value Stocks by Karsten Jeske of earlyretirementnow.com
Read: How Buffett Won His $1 Million Bet by John Wasik of forbes.com
Read: Average Stock Market Return: Where Does 7% Come From? by Trent Hamm of thesimpledollar.com
View: PERCENTAGE OF LARGE-CAP FUNDS THAT UNDERPERFORMED THE S&P 500® at us.spindices.com
Read: SPIVA® U.S. Scorecard at us.spindices.com. This is a downloadable .pdf
Quote: “Don’t look for the needle in the haystack. Just buy the haystack!” – John C. Bogle