- The Washington Times - Thursday, April 13, 2006

As the second quarter of the year begins, it’s time to ask yourself some questions.

Chief among them: Should you be buying individual stocks?

Do a serious review. Like gamblers, investors sometimes focus on their winners and forget about their losers, or exaggerate their winners and deflate their losers.

To justify playing the market, you should look at the stocks you’ve sold over the last 10 years, or however long you’ve been investing. What were your returns? Now, subtract your trading costs. Compare your net return to the net return you would have seen from an index fund for the same time period. If you’re not beating an index fund’s returns, ask yourself what you’re doing.

“Why would anyone buy a stock? I just don’t know,” said John Bogle, founder of mutual funds company the Vanguard Group Inc. and an advocate for investors. “I guess the only real answer is that people like to have fun. I’m all for fun, but not at the cost of your retirement, your next home or your children’s college educations.”

Said Mark Sellers, the former chief equity strategist at Morningstar, “I don’t think individuals should be buying stocks.” Mr. Sellers, whose model portfolios at Morningstar consistently crushed the market, left the company in January 2005 to manage his own fund, Sellers Capital, which now has $60 million in assets under management.

One could argue that he and Mr. Bogle have a vested interest in individuals leaving their investments to the pros.

But the best investment professionals have a different temperament than the average investor. Stock investors need “the ability to withstand big losses and bear markets,” Mr. Sellers said. “Very few people have it.” (And that includes very few fund managers, which is one argument for index funds.)

Ask yourself how you handled the last bear market. Were you constantly recalculating your net worth? And did you do that during the bull market? If so, how far off their height were your stocks when you sold them? How much did the dot-com crash hurt you? Do you lose sleep over your portfolio? Have you ever?

The classic investment maxim is “buy low; sell high.” Do you really do that?

Be honest.

Most individual investors lack not only the stomach for stocks’ seesaw moves, they also lack adequate time to do research. “You can’t do it once a week on Saturday afternoons reading Barron’s,” Mr. Sellers said. “If you could do that, everyone would beat the market on a $150 subscription to Barron’s.”

Instead of buying individual stocks, he suggests investors do some heavy lifting to research mutual funds, looking at a fund’s manager, his or her strategy, and how the manager has done through both bull and bear markets.

Mr. Bogle suggests investors divide their money into two accounts: 95 percent should go into serious money and 5 percent, “not one penny more,” Mr. Bogle insists, should go into fun money. The serious money should go into an index fund, where you’ll get whatever the market is returning, he said.

“In the abstract, put half your money in a stock index fund and get the stock market’s return,” he said. “Put half your money in a bond index fund and get the bond market’s return. I won’t tell you this is the best strategy ever devised, I will tell you the number of strategies that are worse is infinite.”

The fun money account can go to a money manager who says he can pick stocks, or beat a down market. That could pay off big, Mr. Bogle says. Then he adds: So could the lottery.

“In the lottery, the odds are stacked against you hugely,” he said. “On Wall Street, they are, too.”

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