Recently I have noticed online advertising how to invest $1,000 by a company with FOOL in their company name. Honestly, if you have only $1,000 to invest in individual stocks, my advice is that you have no business investing in a single stock. But if you still assist in investing in the stock market, you are better off investing in a mutual fund or an exchange-traded fund (ETF).
Warren Buffett and Charles Munger's prescription for the novice investors ( passive) investor with a long-time horizon is a no-load index mutual fund. A novice (passive) investor is someone who does not understand the fundamentals of investing. The novice investor comprised 90% of the working population in the U.S. Most of this group are familiar with mutual funds from their 401k plans.
However, passive investors (someone who does not pick individual stocks) still have to make investment decisions on which mutual funds to use. To help my readers, I am writing this weekly blog on how to select an index fund.
Use index funds, for example, Vanguard Funds and Dimensional Funds. If you cannot beat the market, at least, you can be the market.
Try not to look at your investments every day. Do not switch investments to time the market. The longer the holding period, the higher the probability of a positive return.
Make sure you select funds with low expense ratios. Less money is going to mutual fund pockets, and more of your money is staying in your pocket. There is no free lunch in the investment business.
Pick funds that have a low stock turnover rate of less than 20%. A fund with a low turnover rate means the fund's operating expense will likely have a lower expense ratio. A Morningstar study showed a lower turnover rate had mutual fund return performance was better over 1-year, 3-year, 5-year, and ten years when compared to high turnover funds.
The investment fund must have at least five to ten years of performance history.
Beware of individual fund managers' changes that have to happen within the last year.
Try not to use too many funds in creating your portfolio. Less is more. I recommend using the Vanguard Total Stock Market Index Fund and Vanguard Total Bond Market Index fund for my beginning investors. The individual allocation is base on how much loss the investor can tolerate psychologically. I will discuss investment allocations in my next blog.
THE PRESENT STOCK MARKET PSYCHOLOGY
Today the Dow is down over 600 points. I feel that we are going to see lots of volatility-lots of market swings up and down. The psychological market activity does remind me of the action before the 2008 meltdown. Wall Street has issued untested initial public offerings for technology companies. Investors ignore the potential antitrust legislation targeted at mega-tech companies like Google, Facebook, and Twitter. Because of the recent Capitol riots and the threat of domestic terrorism. Not to mention how small investors are going gaga over stocks driven by platforms like Robinhood and Acorn. I feel when the music stops; there will be no chair left for the small investors.
The CNN Fear and Greed indicator has moved to the Fear levels just over the last week. The American Association of Individual Investors reports pessimism among individual investors about the stock market's short-term direction rose to its highest level in 11 weeks. Optimism, though lower than the last reading, remained above average. Bullish sentiment, expectations that stock prices will rise over the next six months, declined 2.6 percentage points to 42.5%. Optimism is above its historical average of 38.0% for the 10th consecutive week. Even though the investor sentiment is starting to move fear emotion, I see the fear mentality as a potential for my clients' to start buying low and selling high for the long-run. I will be monitoring the market psychology to advise of the next buy opportunity.
Please contact me if you need any help with selecting your mutual fund options. There is no charge. It's free. My motto is, "The best thing a human can do is to help another human being know more." Charles Munger quote. My next blog will focus on choosing your asset allocation-how much you invest in stocks and bond index mutual funds.
You can reach me at firstname.lastname@example.org.