When you read an article on investing your money, you can just expect to see them tell you about investing in single stocks, one or the other. They tell you how this particular company is great in the energy sector and how that company’s great in tech. and so on. You have to wonder – are all these personal-finance writers such great followers of the stock market they should have information about one or the other individual buys in single stocks among the thousands out there?
Some of them actually do do that. But others just read around a lot and pass on the information they read. The thing is, they don't really feel responsible for what they're doing. They don’t realize that they're just encouraging you to put your money into something that they don’t really know about. What happens if their stock tip turns out to be bogus and your personal financial planning goes out the window?
Well, they just wash their hands off the whole thing when you do that. They just gave you a tip – it was your responsibility to see how good the information was, they'll tell you. Follow their advice and invest in five or six single stocks, and you might as well go on and plonk all the money on five or six horses at the racetracks.
The thing is, your average person just does not have the time or the expertise to understand how the stock markets work in general or at any particular time. When they hear knowledgeable-sounding investment advice from someone who calls himself an expert, they just go and try to follow it.
A far better idea always would be to go with a mutual fund. You certainly do need to do a bit of research to find the right mutual fund. Some of them don't do very well. But the risk isn't as great as it would be if they went and picked individual single stocks out on their own. Go to a mutual fund, and the whole show is run by professionals who place your money in a pool together with the money of thousands of other people. They invest this money in hundreds of companies together.
These choices of companies to invest in tend to balance high and low risk well. Basically, there is little chance that you will actually lose any money. And chances are excellent that you will actually grow it. With well-recognized mutual funds like Vanguard, liberty and the American Century, you can easily make 12% a year over an extended period of time.
An important part of becoming rich is to actually not lose any money that you already have. Investing in single stocks without really, really having a thorough plan for why you're picking them, losing is exactly what it will get to.