By: Laura Walton AFC®
What stock should I buy now?
I’ve fielded this question a few times lately along with this one, “Should I keep contributing to my Roth IRA while the market is in turmoil?”
First, which stock to buy?
Imagine it’s 2004 and MySpace (remember MySpace?) is the #1 social media platform. Then a Harvard student launches something called Facebook. MySpace already has over a million devoted users but, yet, this late-comer trounces them – who would have thought?
So how do you choose between Starbucks and Peet’s, Zoom and Webex, or Zynga and Electronic Arts?
The challenge is that there are a lot of people who pick stocks for a living and even they aren’t very good at it. For example, compare actively managed mutual funds (managed by stock pickers) to passive index funds tracking U.S. stocks in 2019. Passive index funds won/outperformed 71% of the time.
This is why the 3rd Decade program suggests index mutual funds for investors. They allow you to buy the whole market represented by that index, not just one stock. You spread your risk.
This may be harsh but picking single stocks is the investment equivalent of playing roulette. Yes, you’ll be right some of the time and you may hit big once in a while but the risk you take will likely mean a loss at the end of the day.
Remember what our friend Warren Buffett says: “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.” Don’t forget Buffett’s million-dollar bet pitting the S&P 500 Index against a portfolio of hand-picked hedge funds…Mr. Buffett won.
And, the second question, should I keep contributing to my Roth IRA or my 401k right now?
You bet. Stocks are on sale. This is the definition of Dollar Cost Averaging. You’re buying into the market at reduced prices. Your regular monthly contributions buy more shares when prices are depressed thereby reducing your overall cost – see Wall Street Mojo’s chart below.
The only reason not to continue contributing to your retirement accounts at this time is if your finances are severely stressed by our current economic conditions and you need every dollar available for your budget. Then, okay, put a pause on your contributions but start up again when you can.
And remember, the 3rd Decade is always available for questions – just shoot us an email!