Investing Temptation

Investing Temptation

Investing in index funds is boring. So is investing in mutual funds. Buying individual stocks is exciting; and that is where the temptation sets in.

There are three stocks I want to buy because I think they will go up “a lot.” They are all good companies and coincidentally they are all listed in the Dow Jones Industrial Average, and they all pay a higher dividend than the average, so what could go wrong?

• Actually, nothing could go wrong and I could be right, but then what is my exit strategy? Will I sell them when I think each one reaches its peak, or will I hold them in perpetuity? If I plan on selling as soon as they go up, then I become a trader. Note that very few investors have the discipline to sell on the way up, and many then freeze on the way down – so it becomes another “permanent” investment for me.
• If for some stupid unexpected illogical reason one goes down, will I sit with it? If my original assessment was correct, then the downturn is an aberration and I should keep holding it because it will go back up and then I can watch it continue going up according to my expectations.
• If I am right, what are the chances it will continue to outperform the market if I hold it for a long period? Probably not too great. Most stocks tend to revert to the mean. That is, they settle in to their sector’s average over a ten year period. I haven’t calculated this, and perhaps that’s a good project for one of my interns this summer, but I do look at the ten year market averages that many companies include in their annual reports and many seem to settle in to the ten year average.
• If I choose three stocks that I really like, is it possible that all three will perform to my expectations? Maybe and maybe not. I do know statistically that five stocks as a group will not perform significantly different than the average of the entire group they were chosen from. If one misses and the other two hit, then how much better will the average of these three be from the group’s average? Probably not significantly different.
• If I start picking individual stocks, then what is my benefit? How much richer will I become and what changes will result in my life because of this? Unless I put all or a significant portion of my money in these three stocks [which I will not do], I don’t see how the gains will result in any changes in my life style while the losses might cause changes. If I put a small portion in these stocks, they any ups or downs really won’t affect me, but I know from past history that the stocks that go down will upset me. Why should I subject myself to that?

My reality check is that the purpose of my investments is to secure my and my family’s future – not to have fun. Anything that puts my future security at risk is a no-no. I am a grown man and have figured out many ways of having fun without placing my future at risk. Why would I do anything that moves me away from this?

For me, I will stay with the index funds as boring as they are because they will make my life as exciting as I want it to be.