You can live frugally, save and invest at high rates, but still lose your savings due to a fluky medical condition. I know. I’ve seen it eat though savings. Earlier problems are worse due to the lack of compounding. You might not retire at all if you need a group-based insurance plan.

Then there’s also a random market dip around your retirement date. Timing of those random events makes a huge difference. There’s no actuarial table for the S&P 500.

Life is too unpredictable to count on a nest egg without a steady cash flow from assets. That is all a retirement fund is, a nest egg.

You need to read this page:

http://en.wikipedia.org/wiki/Efficient_frontier#the_efficient_frontier

No matter how good you think you are at picking individual stocks, that approach always results
in you being below the efficient frontier (see
the second graph on that page)

Individual investors don’t have access to the tiniest fraction of data available to a mutual fund portfolio mananger (neither do they have a full-time research staff)

You are accepting far more risk than necessary
for whatever current rate of return you are getting.

Or to look at it another way, for the risk level with which you are comfortable, you could receive a higher return with a more efficient portfolio.

Trent really ought to do a post on modern portfolio theory, or why picking individual stocks
is ALWAYS an unneccesarily risky approach for the individual investor.

However, I do agree with you that if you want higher returns, you should do the research and wait for the right time.

Gal

I read that article (possible to retire at 40) when I saw it on MSN’s home page. It was very thought provoking, even though I couldn’t have done it at such a young age.

Just out of curiosity do you get paid from MSN for those articles (15 ways stores trick you into spending) or just an increased awareness/traffic to your website?

It only takes average intelligence to do this. You only need to do a few things right over your investment lifetime to get superior results. Slow down..because activity does not increase returns. Show a little patience and discipline. Wait for the fat picth. You can stand there with the bat on your shoulder. In baseball you will strike out looking, but with investing you are never called for a 3rd strike looking. Wait for the fat pitch. That’s all I’m saying. Hit it out of the park!

Risk lies in not buying with any sort of margin of safety…never asking how much is it worth(as you would when buying a car, groceries, a private business, a house, etc)

Broad diversification at best will ensure average results. The winners will offset the losers(and vice versa) and you’ll end in the middle perhaps…unless you paid a high price for your piece of American business(index fund)….in which case you will always do a liitle less than the average compound.

There is much more risk in buying the averages at any price(never asking “how much” than buying a great business like P&G at a good price.

You will never do better than the averages by buying the averages. A high percentage of managed funds fail even to match the averages over the long run. Concentrating in great business and buying them at a good price will almost always yield better results. But again, each investor has to realize his/her limitations. If he/she wants to be passive and not do any homework, then it might be good advice that he/she dollar cost average the low cost index funds.

I would never advocate that anyone concentrate their 401K into their company stock for sentimental reasons(Enron, Lucent, Cisco, etc). So I’m on record as saying that is usually a bad idea…although Danaher(DHR) shareholder-employees have done super over the last 15-20 years. You have to make these capital allocation decisions from a purely busines perspective.

Or to put it another way, you’re accepting more risk, but receive no more reward.

You can’t diversify away non-market risk by picking a few individual stocks, as you can with mutual funds.

One of the clearest examples is the common mistake of investing 401k funds solely in the company stock.

Plenty of people here locally rode their Lucent 401k from $600,000 down to $60,000.

There are many low-cost mutual fund families available (Vanguard comes to mind)

>Owning the businesses directy greatly reduces costs by eliminating the fund houses and middle men.

You can set up such plans through sharebuilder.com, moneypaper.com, or visit the respective company’s website and click on investor relations. That should tell you if the company has a direct stock purchase plan and from there you will be directed to their transfer agent. Some companies require you to own one share of stock before enrolling. This can be done through moneypaper for a fee, or you can purchase that first share from any broker. Some companies do not require that you own one share…so you could enroll immediately with them.

In addition to solid iconic American businesses with impressive track records, one might also consider certain REITs(Real Estate Investment Trusts)..such as Washington Real Estate Investment Trust(WRE)…. (writ.com) That one has delivered fantastic returns over the years, and has paid increasing dividends all along the way.

Those who allocated funds into the averages in 2002 or early 2003 have a far better compound than those who allocated funds in say 1999/2000 when market prices were extended.

You have to ask yourself “How much is it worth cuurently?” If you lack the ability to figure it out then it is always best to resort to dollar cost averaging. Broad diversification does not protect one from paying rediculous prices for their share of American business.

Warren Buffett said it best…”We prefer to be greedy when others are fearful, and fearful when other are greedy”.