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Subject:  Index fund investing versus stock selection Date:  10/6/2007  1:12 PM
Author:  luke77 Number:  59448 of 107470

Hi eveyone,

I am a long-time reader of the fool boards, and a recent college graduate. I very much enjoy following the stock market, and am actually working in finance on wall street. For the first time in my life, I am making enough money that I am able to start saving substantially for retirement. I am lucky enough to have no debt, no student loans, and no credit card balance. I also have enough liquid cash to cover my expenses for a while if something horrible happens, plus I have a supportive family that would take me in. I am planning on maxing out my 401K but need some advice regarding how to invest the other money that I will be putting towards retirement.

I think I have basically two options. Either invest in no-load index funds like the s & p 500, or try to beat the market by selecting individual stocks to hold for the long term. Basically, I'm confused by the contrasting information that there seems to be out there. One the one hand, the index fund folks like to espouse the view that the majority of money managers and individual investors do not beat the market over the long term. Although I do think that I am probably an above-average investor, I don't think it's smart to assume that I would do better than average, esspecially since money managers spend their entire lives analyzing stocks (though I know they have some liquidity constraints that I do not). It usually gets people in trouble when they assume they are smarter than everyone else.

On the other hand, the other school of thought for retirement investing seems to be "You're young, invest aggressively, you can deal with the risk and volatility since you won't need this money for 10+ years. Your best bet is to build a small portfolio of high-quality growth stocks". To me, this seems paradoxical if you assume that the index-fund stats are true. If most people cannot beat the market, what is the reasoning behind buying individual stocks, even if the outlook is long-term? My goal is to get the best return possible - if, on average, most people underperform the market when they do this, why would it matter what my risk appetite is? The assumption seems to be that more risk=greater return, but the index fund stats would suggest that this is false, right?

Out of necessity, my 401k money has to go into funds, so at most about half of my savings will be invested at my discretion. The only decision I have to make is whether to invest ALL of my money in index funds or whether to build a portfolio with half of it.

I guess the reason that I ask this question is because I'm thinking about using one of the Fool's advisory services - either Stock Advisor or Hidden Gems. Although I'm disheartened at the level and tone of advertising that these services have developed, I've been very impressed by the quality of these products (I did the free trials a while back), and if you look at their performance (although admittedly fairly short-term), they've outperformed the market by a good deal. If I do decide to buy individual stocks it will probably be under the guidance of one of these I guess this just restates my original question - is it better to try to beat the market in this way, or should I buy straight index funds?

Thanks very much for any advice, opinions, or even direction for good sources of advice on this issue.

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