"I am a young individual starting to get my life on track. I want to start making some real money for the future, so I want to start investing. My knowledge of the stock market is very limited. How do you suggest I get started with a limited amount of money? I know a little about Mutual Funds, however I want to try investing on my own. Do you think this is wise?"
Well, it’s certainly wise to get your life on track and begin investing. Whether it’s wise to compete with experienced investors and professionals when your knowledge is "very limited" is another story. Even a Nobel laureate like Bill Sharpe, one of the great names in the investment world for his work identifying the importance of — and then quantifying — risk-adjusted return, invests much of his own money via index funds. These are funds with very low expenses and low taxable gains because they just buy and hold "the market" as a whole. You (and he) obviously won’t beat the market this way; you’ll trail it by about a quarter of one percent. But you’ll beat most other mutual funds, and most of your friends.
That said, investing on your own can be fun, exciting and profitable (or addictive, self-destructive and money-losing). Millions of us do it, and with the new ultra-low commissions available, the odds are much better than they used to be.
You might want to read books like A Random Walk Down Wall Street (Burton Malkiel) or The Only Investment Guide You’ll Ever Need (me) to get some sense of what you’re getting into. And you might also want to wait a few more weeks for Barron’s annual "Roundtable," which fills the first three or four issues of each new year. There, a dozen of the world’s top money managers describe what they like and hate and why. It’s fascinating reading and will give you more than enough ideas of what to invest in and avoid. You’ll also see how they think and what you’re up against in competing with them.
The good thing about the investment game, unlike many others, let alone Las Vegas, is that in theory everyone can win. Some will do much better than others, but over time everyone can participate in the growth and profitability of the world economy.
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The art of acting consists of keeping people from coughing.~Sir Ralph Richardson
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