Wednesday, May 23, 2012

Facebook's Timely Lesson

It is a seldom heard and even more seldom heeded maxim: In general, people should not buy individual stocks.
Source.

Well, three days into its first week of being a publicly traded stock and the much fawned over Facebook (ticker symbol FB) has lost 18% of its value. Now I don't want to rub salt into any open wounds for those who may have bought the stock but as an important object lesson this is too good to pass up. The point being that buying individual securities is ALWAYS a form of speculating. You are trying to outsmart the financial markets and very very few people can do this with success over the long term. There is a mountain of statistical evidence and studies showing that in any given year around 2/3 of your high priced Wall Street money men will underperform their respective index. Over any given ten year period it's about 90% that fall short of the index. When you further factor in the generally steep fees and expenses they charge, or that you pay your broker in trading fees and then add on the tax implications of trading stocks, the number of those who beat the market becomes statistically insignificant.

You are not going to beat the Street especially over the long term. Wall Street is the world's biggest casino and they have the house advantage from all those fees and expenses.  Even worse this casino is as crooked as your dog's hind legs. Insider trading and price fixing are rampant. Remember when you buy a share of Facebook or whatever stock you think is about to get hot you are probably buying it from some big investment bank, which means they think it is going down. These people have every tool in the world at their fingertips (legal and otherwise) and they still come up short of the index most years. What makes you think you are going to be in the 1% that actually beats the house by a wide enough margin to make up for all the fees and added taxes?  Here is the bottom line... Speculating is a suckers game.

Folks if you are going to be invested in stocks (and most people should be) stick to one or two broadly diversified low cost index funds or near equivalent ETFs. This is the only way you are likely to get your fair share of returns on the stock market. As far as asset allocation goes, being deeply conservative, I am a fan of the late Harry Browne's Permanent Portfolio (see here and here). But even a very simple 50/50 portfolio suggested by the legendary Jack Bogle consisting of half in a total US Bond Market Index Fund and the other half in a Total US Stock Market Index Fund will give you good returns over time with limited risks. Look for the cheapest funds you can find, reinvest the dividends and then leave it alone other than for rebalancing once a year or as needed.

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