|Marc Answers: “What Stock Should I Buy?”|
|Marc Lichtenfeld, Chief Income Strategist, The Oxford Club|
My Uber driver asked me what I do for a living. When I told him I write about investing, he asked me if I’ve written any books. Though it was awkward, I told him that the name of my new book was You Don’t Have to Drive an Uber in Retirement (which, by the way, just became available as an audio book).
I knew the question was coming. And after about only 30 seconds, it did. It always does.
“What stock should I buy?”
When I explain to most people that owning a portfolio of quality dividend growers over the long term will help them generate outsized returns and grow their wealth, their eyes glaze over. They don’t want a quality company that will steadily go up. They want a winning lottery ticket.
The driver dropped me off at the conference center. I was in Las Vegas to deliver a speech to educators who would be teaching financial literacy for the first time.
During my presentation, I mentioned the statistic that turned me on to investing.
If you invest the same amount of money every year from the age of 21 to 31 and stop – but keep the money in the market – you’ll have more at age 65 than you’d have if you had started at 31 and continued investing the same amount every year until you were 65.
That’s the power of time and compounding.
Afterward, a first-year teacher (a kid who was about 23) told me he’d been investing in a Vanguard S&P Index fund for the past few years and planned to keep doing it.
Teachers are underpaid, especially given their profound impact on our kids. They don’t make a lot of money.
But I looked at this guy, smiled and said, “You’re going to be wealthy one day.”
He smiled broadly back.
|If this teacher had the discipline to start investing while he was in college – and do it in a very inexpensive and prudent way – he has what it takes to be an excellent investor.
And the thing is, once you have your long-term portfolio taken care of, you can start to speculate to give yourself a shot at the really big gains.
Let’s say you have $500,000 in your retirement accounts and other long-term accounts – enough for you to feel like you’re on track.
At that point, you can afford to speculate in the market. Maybe you buy a small cap biotech stock or a momentum stock. Many speculators are getting into marijuana stocks or penny stocks.
Some of these are more risky than others, and you should always understand the risk involved. But if that investor took $2,000 and turned it into $5,000, their entire portfolio has gained an extra 1%.
That may not sound like much, but over the years that extra 1% in a portfolio can mean tens or hundreds of thousands of dollars.
If you had a $500,000 portfolio that was invested in my 10-11-12 System (which is designed to generate 12% average annual returns with an 11% yield over 10 years) and achieved the 12% goal, you’d have $1,552,924 after 10 years.
If you could boost that by 1% per year with effective trading, your portfolio would be $142,000 higher.
The flip side is if your speculation doesn’t work out. With a $500,000 portfolio, if you lost the entire $2,000 investment, it would sting, but it would be only 0.4% of your entire portfolio. Not the end of the world and fairly easy to make back.
But if you don’t have that comfortable nest egg and are speculating when you have, say, $50,000, a $2,000 loss is 4% of the entire portfolio. That will be difficult to make up in the short term.
Speculating is a great way to make some extra money, and it’s fun too. But make sure you have your long-term goals fully funded before you start playing with riskier bets.
So when the Uber driver asked me what he should buy, my answer was, “My books… or anything that will teach you how to invest for the long term.”