Guide to Investing in the Stock Market

[Amos Hannah]

Most of you with money to invest must decide either to "do it
yourself" or hire someone else to decide where the money should go.
This process of asset allocation always involves placing (usually) the
majority of funds in stocks of companies worldwide. The "best" way to
accomplish this is certainly subject to argument and controversy;
however there is a significant body of academic and historical study
that can help.
Here are a number of relatively well accepted facts:
1) Over long periods of time (10 years and more), stocks outperform
bonds and cash.
2) Although there may be some actively managed mutual funds and stock
pickers that can outperform the indexes that they invest in, it is
doubtful that you or anyone else can identify them in advance. It is
much more likely that owning a group of stocks in an index (index fund
or equivalent) will outperform and cost less than paying someone to
pick the "best ones."
3) Investment success is highly correlated with buying when others
sell, and vice versa.
4) The above is very hard to do.
Given this information, what is the investor/advisor to do? The facts
support so-called "passive" investing, in which funds are placed into
low cost, diversified index funds and occasionally rebalanced. This
sounds simple, but is misleading. Although investing in different
market segments (American Stocks, Overseas stocks, Natural resources
stocks, etc.) is probably done most efficiently with indexing-the
investor must make the active choice of how much each asset class must
be used at any given time.
For example, over the last two years-the Natural Resources and
Commodities, and general Overseas market indexes have markedly
outperformed the American stock market. How much of your portfolio
should have been in the former categories two years ago? How about
now? Of your American stock market investments-how much should be in a
total market index instead of some other mixture of small vs. large
companies?
The point I'm making is that the process of investing and asset
allocation is never simple. One must carefully weigh historical
valuations, investor risk tolerance, investor time horizons and have
some "feel" for future trends to do a good job. This process is being
performed by thousands, if not millions of full time professionals
worldwide-and is not a process for amateurs. The financial press
doesn't help with its myriad lists of "ten best stocks or funds to own
now," as study after study has demonstrated that this type of trend
following is doomed to failure.
Certainly, there are reasonable compromises that allow an investor to
self invest and have probably decent long term returns. However, even
these asset allocations require discipline, investigation and review.
There is no short cut to investment success. Paying an expert is
certainly reasonable, given that we all do so for help with medical,
legal and accounting issues on a regular basis.
Summing up, investing in stock markets involves actively choosing an
asset allocation, and then usually using a "passive" vehicle (like an
index fund) to invest in each of the different asset classes chosen.
Both the initial asset allocation and changes in the future require
time, work, knowledge and continued learning.

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