Home » MONEY FORUMS » Investing » If a relatively inexperienced person wants to try and get into “playing” the stock market, is there any reason for them to invest in something other than an index fund?
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Posted by Cory (MONEY FORUMS: 4, Answers: 0)
Asked on November 30, 2015 8:19 pm
As others have said, experimenting with selecting stocks and deciding when to buy and sell them is an important lesson. But for your serious money, investing in low cost index funds or index exchange traded funds is the smart strategy.
One point others haven't mentioned yet here is the importance of committing long-term to your investing. Stock price swings over shorter time periods, which are real and scary sometimes, make little difference if you're committed to focusing on results over many years. Even investments in stock index funds have unsettling ups and downs, but check out historic performance over investment periods of 10 years or more and it won't feel so scary.
My quick take: VERY few people can beat the stock market. So why work hard to achieve less than investing in index funds? Index funds are easy and profitable. It just doesn't make sense to try doing it yourself, in my opinion. Unless you think you're extremely gifted.
William Bernstein- who is arguably one of the smartest investors of the modern era says that it is important to remember that long term returns are the only returns that matter.
If you're interested in playing the stock market, then you are probably interested in day trading. Almost 85% of day traders lose money, so this is a glorified form of gambling.
I think that day trading is perhaps a fine hobby, but not a good investment strategy. Index funds are a great investment strategy for those who are mostly interested in passive investing (passive investing is a great way to be disciplined in your investments).
There are also active forms of investing that can be equally disciplined and therefore equally or more profitable than index investing. Most people (and most hedge fund managers) do not succeed in being active and disciplined which is why passive index investing is such a popular investing method.
If you are interested in learning about portfolio management, start by learning about modern portfolio theory (the efficient frontier), and then consider learning about more active investment styles (these will include buy and sell rules). Don't be hoodwinked into buying a complex investment tool that is more profitable for the seller than it is for you.
Hi Cory, great question. I think the difference is whether they are "playing" or investing. If investing, the lower risk of a low-cost index fund would be the way to go. If it is a question of playing, then there are several factors to consider.
Playing in the market can be a great learning tool, but comes with risk. The big issue then, is in limiting the amount that you can lose. The easiest way to do this is to keep the play investment dollar amount small - not more than you would be willing to lose! It helps if you invest in something you know, or are at least familier with. Do your homework and research the company, the competition, and the market thoroughly.
An alternative way to play in the market would be to do it in the form of a game, doing the research, selecting one or more stocks, and then tracking the performance without actually investing any money into the market. Can be a lot of fun if you set up a competition with a few friends - see who can do the best over a predetermined timeframe with a set hypothetical investment amount. Of course, while this brings your risk to zero, your upside is also zero. Many times the lesson this game teaches people to put their money into a good index fund!