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You wrote, When they recommend the 15 to 20 solid stocks in your portfolio, are they referring to just individual companies, or is it common to include some broad based index funds, such as the S&P 500 and others with the individual stocks? Or should index fund investing be done in another brokerage account? Thank you

Who are they? I don't suppose you bought into one of TMF's newsletters?

Most new investors probably shouldn't bother with investor newsletters. They should instead just pick either a broad stock index fund - like an S&P 500 fund - or they should choose a target date or strategy fund that takes all the guess-work out of investing for you.

Newsletters are generally sold to people that aren't satisfied with average performance and want to try to juice their returns in an effort to beat the market. But before you go out and try that for yourself, consider that something like 90% of actively managed mutual funds don't beat their benchmark indexes. Those are supposed to be professional stock pickers … and most of them aren't disciplined enough to at least get "average" returns.

So my recommendation to anyone just starting out is to start with a rather bland portfolio with just a target date fund or a broad stock market index or two. If you want to try your hand with juicing your return, don't do it with money specifically earmarked for retirement or other major goals. Instead start with just a small portion of your portfolio and set it aside as seed money. This usually means accumulating a fair amount before you seriously consider making direct stock investments.

Even then you should figure that this is going to take a good deal of your attention. Personally I've found that some of my best investment ideas haven't been ones anyone else has recommended to me - they're ones for which I've formed an investment thesis and come up with a strategy to profit from it. Usually that means some significant work on my part. What's more, my good ideas have usually had a "shelf life", meaning they work until enough of the rest of the market catches on, then they don't.

So my point is that there are very few significant investment opportunities that don't involve some kind of real work on your part … except for index investing. On the other hand index investing can give you serious returns without needing to spend your valuable time on it. Did you know that the S&P 500 total return index has yielded something like 10%/year? The returns are very, very … lumpy. And about 2% of that is from boring old dividend yields. But those returns are very real and there have been lots of diligent stock market investors that have made serious money by just investing in an S&P 500 index fund.

Now as for your specific questions:

1. Investing in the S&P 500 gives you the diversification of investing in the 500 largest US companies by market capitalization, while picking 15 or 20 individual stocks is probably just the minimum you need to minimize your single stock risk. Most people should just pick a broad index fund.

2. Buying individual stocks must be done with a stock broker. Buy an index mutual fund can be done either at a broker or in some cases directly from the fund company. However many large brokers have decent low-cost index fund offerings available. Whether or not you separate stock and fund purchases into separate accounts depends on a) personal preference, and b) whether or not some of the investments are in segregated accounts such as an IRA. In may respects the decision of whether or not to separate your purchases into different accounts is an orthogonal issue from whether or not to buy individual stocks or just an index fund.

- Joel
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