Are you Warren Buffett? Are you a magic elf? Stay away from stock picking unless you answered yes to either of those questions.
When you invest you’re making a bet: either you think you can do better than the market or you don’t. If you think you can do better, you pick a bunch of stocks that you believe will go gangbusters. If you don’t, you put your money in an index fund that mirrors a huge benchmark, like the S&P 500, so you end up owning a little bit of a lot of companies.
Research shows that humility is the smarter bet.
Let’s look at 2015’s stock returns. Only 34% of mutual fund managers that invest in big companies did better than the market. 34%! And these are professionals. They’re working full-time on beating the market. And still, two-thirds of them failed. If you’re an amateur, your odds of success will be even worse.
You have a bunch of options instead, but one solid choice is to invest in a low-cost target-date fund. One good selection for younger workers is the Vanguard Target Retirement 2050 fund.
You’ll get a diversified set of index stock and bond funds for cheap. And that mix will be age-appropriate. When you’re younger, it will be dominated by stocks, which have a higher return over the long run. And as you get older, the mix will automatically change to have more bonds…which will give you more protection against losses and preserve your hard-earned savings.
But if you really, really, really want to take a flyer on the next Facebook or Apple, fine. Just make sure you only do it with 5% of your portfolio. If you’re going to lose money, make sure you lose small.