Tuesday, June 27, 2006

Look for the simple answer first

What is wrong with this guy?

He calls himself an answer man, but he hasn't got a clue. This girl writes in:

I am a first-time serious thinker of investing in a stock, I haven't a clue on where to begin: With whom or what company? All I know is, I want to invest. I have tried looking info up online but I am more confused that ever. Is there any way you can give me a breakdown on how to begin and what to trust and what not to trust? I am literally like the most clueless person on this; I could really use basic instructions on how to begin.
Tiffany, Murrieta, Calif.

Okay, so for this sort of person, she clearly has decided that she should "invest" in something or other. Somebody probably told her about how you could make way more money in stocks than in a savings account. The problem is that when people say that you should invest in "stocks" or "bonds" or "equities" or what have you, most of the time they don't intend that you should invest in any single stock. If they did, they'd probably have pointed out a few that they like. My heart just goes out to this poor clueless girl. All she needs is a nice mutual fund, maybe something simple like an S&P 500 index fund. But nooooo, Mr. Man gives her an entire page of crap that I didn't understand about her two options: getting a financial advisor to pick stocks for her (expensive and really pointless!) or researching stocks herself. Why on earth did he not just recommend that she look up some mutual funds? Even the complicated statistics of a mutual fund are a lot easier to understand than the vagaries of an individual company, whose health you must monitor to understand how much the stock is worth, what you should pay for it, and whether it is going to go up or not.

He ends the article after a bit on joining an investment club with the line:
And by that point, you maybe ready to become a financial advisor yourself.

Mr. Man, if she WANTED to become a financial advisor, she would probably already know about mutual funds and such. What she actually wants is for you to give her a website that will tell her three stocks to buy that are guaranteed to go up 20% a year forever and send her flowers on her birthday. Unfortunately, such things don't exist. But a mutual fund is the second-best thing, where you can see manager tenure, 10-year return, and relative risk statistics to get an idea of whether it is a good idea or not. And Morningstar does have a fund screener that will do basically that.

I feel for this girl. I really do. Because now she's probably so confused that she's just going to leave her money in the savings account.

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