I just recently traveled to Vegas for the first time. There are so many lessons to be learned from one trip to Vegas and I will mostly keep with the theme “what happens in Vegas stays in Vegas” except for those important financial lessons that shouldn’t remain there.
As a financial advisor, people frequently ask me about buying individual stocks—“Should I buy Apple?” “What about Ford?”—and I have a difficult time responding to them. If they are asking about buying these stocks because they heard something on the news or like the product, then my feeling is that buying that stock is not too dissimilar from going to Vegas and putting your money on red. Some people enjoy Vegas for that kind of excitement. As for me, I appreciated the shows, food, and late night drinking. Yes, Apple, Ford, or other high quality companies could be good investments; however, if they are not part of a well thought out and constructed portfolio, then there are no guarantees about the kind of returns you can expect from owning them.
The financial markets have gotten increasingly more complex for individual investors. There are a number of other buyers out there, including large hedge funds that use computer models to inform their buying and selling choices. With all the factors impacting each individual stock, it can be difficult to predict long- term performance. In October of 2007, I owned Bank of America stock (through my 401k) at $52.07 per share. I left Bank of America in July of 2008, and I had the option to sell the stock in my 401k at $22 or take the shares. I thought it was crazy that Bank of America stock was trading at $22 (I just knew it would go back to $52 in the future) and OF COURSE I was going to take the shares. Then I watched that portion of my IRA go down to $3.95 in February of 2009 and now it is around $14.61. There are obviously a number of reasons why Bank of America in particular has gone through this price volatility; however, even intensely analytical investors do not understand why it still trades below its book value. There are many stocks that have experienced similar price fluctuations that are difficult for analysts to explain completely.
So how do you keep from feeling like going to Vegas if you want to own stocks? There are a number of things you can do to take away some of the stress. The first is actually setting aside what I would call “play money” just like I would advise you do to if you were going to Vegas. This is money that you don’t necessarily need for any particular life goal. Then take that money and buy the stocks that you find interesting or want to own for personal reasons. The next suggestion is that you buy a well-constructed stock portfolio where you own stocks of different sizes, different industry groups, and different geographic areas. This diversification will help reduce the volatility in your portfolio. It is not the same as putting your money on red and black, but it is much better than just being on red. The final option would be to own pooled vehicles like mutual funds or ETFs. These investments give you exposure to numerous stocks as determined by either a portfolio manager or an index. Just purchasing a handful of shares of these gives you instant diversification to help lower your stock market risk.
No matter what your preference is for investing in the stock market, make sure you are informed on what you are doing and have fun doing it. If you feel intimidated or scared, ask questions until you get the answers that alleviate those feelings. The financial markets are complex, and just like you should know your odds before you play any game in Vegas, make sure you are fully informed on your investing!