There is almost an entire field in investment journalism that lives to tell you, "Don't even try to beat the professionals, they're not only better than you, they're not even that good." I'm not even going to look for all the links to articles and charts that show that for every successfully managed mutual fund, there's five that actually lose you money when compared to that index fund you should have bought.
So, conventional wisdom -- and, I suppose, actual wisdom -- tells me to buy something like the Vanguard 500 Index Fund and sit back and watch my money grow the way it always has: slowly over time with the inevitability of the Dow's march toward the next threshold.
But I don't listen. Instead, I manage a lot of my own money. I use TD Ameritrade because I started with it when it was known as eBroker and was, back in 1996, the best of the fledgling, newfangled online brokerage services. I've also dabbled in E-Trade, and I have an insurance broker where I've parked some of my stock picks. I say find an online brokerage you're comfortable with, whose commission structure is cheap, and use it. I like Ameritrade.
Here it is in front: I made money leading up to the dot-com bubble and had enough to still have profits after the carnage. Did I get out when I could have made a bundle? Nah, unfortunately. But I realize why it didn't matter. If I had sold everything in 2000 just in time to make that bundle, I would have reinvested it in 2001 when the carnage seemed over and yet there was still some downside left. So, I rack up some profits, paying some sales commissions, then wait a while until I think I'm out of the woods and then pay a bunch of purchase commissions to get back into the market just in time to catch Act Two of the popping bubble. Real smart. Instead, I hung on and finally took profits five years later when I was healthier and wanted to buy a house.
This leads to my number-one rule: even with self-managed stock portfolios, buy and hold, period. This runs counter to the number-one rule of actual professional traders: set your levels for taking profits and set your levels for selling to stop the pain. This is discipline, for chrissake. I don't know how to do that, so I solve my problems in a different way: I make enough smart picks to begin with that will counter my stinkers.
What does this mean for us supposedly savvy non-professionals? It means for every share of Citigroup that I foolishly bought, I bought a share or two of IBM, and for every share of Nokia (why do I always buy Nokia??) I purchased, I grabbed a few shares of AT&T, Verizon, and Deutsche Telekom. Now these three telecoms are often in the red in my portfolio, but they pay dividends, and good ones, like clockwork.
So, here's my rule number two: Like Warren Buffett, I buy what I know. Telecoms I get. We're going to be using cell phones and handhelds until the end of time -- or until we start having chips installed in our heads, which is neither far-fetched nor that far off, so watch for that trend and jump on.
I also get technology well enough. I have a rule there, too. Don't always buy the big names (though I do own Microsoft, Intel, IBM, Dell (oops), etc.) but instead buy the big names most people don't know. So instead of owning chip makers, own the companies like Applied Materials that make the machines that chip makers use. Buy something like Taiwan Semiconductors, not the firms that need the semiconductors.
As another example, don't buy oil companies (though I do own some of the usual suspects) but instead buy oil services companies and oil exploration companies. These are the companies that service the oil companies, companies like Enterprise Products Partners, Baker Hughes, and Sunoco. I've done well with them and enjoyed their dividends.
There's another area I almost want to keep for myself, but that's stupid. It's just that it was my greatest success and, as far as I know, I thought it up myself. It's healthcare REITs, especially those serving seniors.
REITs are Real Estate Investment Trusts, companies that are in the business of buying, selling, managing, and developing real estate properties. There are hotel REITs, commercial REITs, shopping center REITs, rental property REITs, and so on.
Here was my rationale. What are the baby-boomers going to need as they begin to retire? Healthcare services. Who is going to profit from this, besides healthcare providers and drug companies? Why, I thought, how about the companies that build, buy, and manage healthcare properties? Real estate, back in 2007 when I made these investments, was in the doldrums big time because of the housing bubble, which affected commercial real estate, too. REITs really took a hit.
But as our society ages, we're going to need more medical offices, diagnostic centers, convalescent hospitals, assisted living complexes, and long-term care facilities. So I searched, and sure enough, there were at least a dozen healthcare REITs, and I bought them. And here's the best part of REITs: they have to return 90% of their taxable profits to their shareholders. So, like clockwork, the money comes in, even as the share prices, by and large, have gone up.
I won't list them; that'll take too long. Look for them yourself and research them. You'll be glad you did.
Oh, an important note: Use Yahoo! Finance, MSM Money, Google Finance, or whatever your favorite financial portal is, to research, research, research. And go ahead and visit Motley Fool, The Street.com, Seeking Alpha, MoneyWatch, Bloomberg, or any of the stock market advice and news sites on the Web. And I highly recommend PBS' Nightly Business Report and Bloomberg TV. But remember: Don't just listen to advice and then pull the trigger. Somebody's hot pick is often tomorrow's big loser. Does anyone remember Sun Microsystems? I bought it back in the day, and, boy, do I want to forget it and whoever recommended it to me. Take stock advice with a grain of salt and do research to back it up.
Then, of course, are the must-haves in any stock portfolio: Procter and Gamble, Johnson & Johnson, Pepsi and Coke, General Electric, Dow Chemical, Dupont, Gillette, and the sort. These perennials are reliable and often deliver in the dividend department. Many of these stocks are referred to as consumer staples, cyclicals, etc. They ride the business cycle, pay good dividends, and generally rise over time as the population and GDP increase.
I have to mention utilities, like Con Ed in New York, and drug companies, like Pfizer and Merck. Prices go up and down, especially when drug companies lose their most prized patents or get sued for a crappy drug. But in the end, seniors and everyone else will need their drugs, and we'll all need our gas and electric.
I admit I've dabbled in foreign stocks, like Nissan, Toyota, Honda, and Diageo, and I've gotten mixed results. The rule still applies: Buy what you understand. In the end, I'll probably be happy I bought and kept them. Who anticipated the tsunami, for heaven's sake?
There's an important technical decision, and that's concerning dividend reinvestment. Your portfolio can either build up dividends and payouts, which you can use to buy new stocks, or you can tell your brokerage that you want to automatically reinvest your dividends. In that case, when a stock pays out a dividend, it's automatically used to buy new shares. Over time, the number of shares you have in each company grows and in turn pays even more dividends that are then reinvested and so on. That's a passive and smart way to go. Of course, not all stocks pay dividends, and not all that do participate in the dividend reinvestment program, but the vast majority do.
When should you not reinvest dividends? When you want the money as income, like during retirement.
Okay, almost done. There's another area called ETFs, or exchange-traded funds. These are mutual funds that trade in the stock market. I've got a slew of them, mostly index funds that specialize in high-yield, high-dividend stocks, plus a couple of REIT plays. I also have QQQ, which is a NASDAQ 100 fund that tracks that high-tech stock exchange. It's a passive way of investing in technology without having to do the heavy lifting.
This is what I've done to actively play the stock market. The big boys play by different rules and have significant advantages, such as engaging in high-speed, high-volume trades where they can manipulate a price and pull a millionth of a cent profit out of thin air. If they do that with a billion shares, you're talking serious money. We can't do that. But what we can do is buy what we know, diversify (you noticed, didn't you?), stay calm during the panics, buy during bottoms, sell during peaks, or generally just hang on until, years later, you sell to buy a home, or just take your dividends as income in retirement like I'm doing.
Good luck. The stock market is really The Big Casino. But you can win, as long as you can afford the risks, are willing to change the odds in your favor with research, and stay in the game till the chips pile up. I've done it, and so far, so good.