Is this a public service or what?
This guide is not professional investment advice. I have written it for entertainment purposes only. Or sort of.

Should I put my money in the stock market?
It depends. The uncertainty about the outcome of your investment will be psychologically painful - maybe even physically so. If the expected outcome of your investment (for example, earning 10% a year) more than compensates for your expected pain then you should go ahead. But remember that you may end up losing money.

Hmmm, maybe I should keep my money in a bank deposit, or in government bonds, or any other safe place, even if I earn only a modest interest.
Those places are safer than the stock market. But they are not completely safe. Banks and governments go broke. Also, the interest you earn in a relatively safe place can be lower than the inflation rate. This means that after some time you will have more money but this money will buy less stuff.

Ok, let's consider the stock market. At least it is safe in the long run. Stocks always go up in the long term, right?
Wrong. They can go down in the long term, and they have done so during some periods in the past. If you keep your stocks for many years you can earn a lot of money, but you can also lose a lot of it - compound interest cuts both ways. A real disadvantage of holding stocks for a short time is that purchase and redemption fees will eat up a large portion of your earnings or substantially add up to your losses. These fees become proportionally less significant the longer you hold your stocks.

Which stocks should I buy?
You should invest in funds that comprise a variety of stocks. Investing in few stocks is riskier and no more rewarding in terms of expected yield.

But some people got rich by investing in one or a few stocks (say, Microsoft or Apple) instead of a diversified portfolio?
Others lost their money. On average people who invest in a well diversified portfolio end up with as much money as do people who invest in few stocks (or more, by saving on fees). That's the average, which counts both those who become rich and those who go broke.

What about cues from experts? Experts tell me to buy certain selected stocks that they expect to do particularly well.
What experts "know" is probably false or already reflected in high stock prices (which are, as a result, unlikely to go much higher) or both. It is also possible that your experts have some very special insights. But you have no way to tell whether this is actually the case. And you cannot trust an expert for his past successes because his record can be due to luck.

How do I choose my funds?
You should look for funds that hold a variety of stocks, have small fees and are tax-efficient (but I will not dwell on tax efficiency, which is country-specific). Fortunately, highly diversified funds have small fees. The best example are the index funds, so called because their performance is tied to broad stock market indices. They hold a large number of stocks that are representative of the wide market. There are two kinds of index funds - index mutual funds and exchange-traded funds. Generally speaking, because of the purchase, redemption and day-to-day expenses that they carry, traditional mutual funds are better for investors that frequently add or withdraw money to or from their funds, while exchange-traded funds are better for investors who make few such transactions.

You must look at the fees, and more specifically at the expense ratios. For example, Vanguard's Total World Stock Index Fund Investor Shares exchange-traded fund (VT) has, as of 2010, an expense ratio of 0.30%. This means that Vanguard, the fund manager, takes 0.30% of your invested assets every year. To this we have to add the purchase and redemption fees, which are almost irrelevant if you hold your funds for many years, and fees charged by your broker, which should be the same for all similar funds. The VT fund is very well diversified - it holds shares of the top thousand companies in the world based on their capitalization. The similarly diversified iShares MSCI ACWI Fund (ACWI) has an expense ratio of 0.35%. But you can pay smaller fees and get a similarly diversified portfolio by combining several smaller funds. For example, you can get a similar exposure to the world's largest companies more cheaply by combining three of Vanguard's regional exchange-traded funds: VTI (which holds shares of North American companies and has an expense ratio of 0.07%), VEA (other industrialized countries, 0.15%) and VWO (emerging markets, 0.27%). To invest in each region proportionally to its weight in the world stock market you would have to put about 42% of your money in VTI, 42% in VEA and 16% in VWO. You can check the expense ratios of iShares and other funds, and compare.

Shouldn't I check the recent performance of those funds and then make a more informed choice?
No. The best choice is a diversified, cheap portfolio. Period.

Experts tell me that I should build a more sophisticated portfolio by adding more narrowly focused and more promising funds. They say I should invest in funds that focus on certain 'hot' countries, industries or companies.
See above regarding cues from experts.

Everybody around me invests mainly in my own country. Why do you suggest a worldwide exposure?
Because it is more diversified and thus less risky. There is no advantage whatsoever in specializing in a given country or region. (But check what particular taxes apply in your country for each kind of investment.)

When should I buy my funds?
As soon as you decide that the stock market is for you.

If the stock market is going down, shouldn't I wait until the prospects get better?
Nobody knows when, if ever, the prospects will get better.

When should I change the composition of my portfolio?
Keep an eye on whether cheaper financial products become available. If new financial products appear that have substantially smaller fees than yours, it may pay to sell your funds and buy the new products. Otherwise, keep your funds. Don't rebalance your portfolio. If you don't know what rebalancing is, don't bother - it's expensive and useless.

When should I sell and enjoy the cash?
You must decide when it is the right time to spend your money or to change your investment strategy (say, to leave the stock market and enter the bond market) based on your life circumstances. Once you have made up your mind, sell. Don't decide when to sell based on how market prices are faring. Nobody knows when it is the 'right' time to sell in order to maximize earnings.

Do you have any other advice?
Don't ever check the value of your portfolio and don't ever read the stock market news. The stock market has generally done well in the past. But it has done so following an erratic path. It has gone up and down in a seemingly random fashion. About half the days it has climbed, and half it has fell. Those who check their portfolio's value daily are happy about their gains half of the days and sad about their losses the other half. The dark side of this fact is that we react more intensely to losses that to gains. The pain of a loss is more than twice as large as the joy of a gain of the same size. So, people who regularly follow the value of their portfolio experience more misery than joy.

Do you really think that stock prices will go up, as they have mostly done in the past?
I have no idea.


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