Updated on 09.15.14

How To Invest In Stocks: Conservative or Aggressive?

Trent Hamm

If you’ve read the reader mailbags for a while, you’ve noticed that I often get messages from people who have worked their way into a good financial place and now have some money to invest, often for the first time in their life.

They look around, watch CNBC, read investment advice online and in books, and still aren’t sure exactly what to do. Should they keep the money in cash, or buy a CD from the bank? Should they invest in stocks, and if so, should they buy individual stocks or put money in a mutual fund? What about bonds? What about real estate?

The options seem overwhelming, as do the potential risks and rewards. I’m going to offer a few ideas that I’ve learned over the years that will help anyone that’s just starting to invest.

First of all, there is nothing that will guarantee you a great return. If anyone is guaranteeing you a large return – and by large, I mean more than a couple percentage points higher than what you’re getting in a savings account – be very, very wary. Such investments usually have some sort of giant drawback, like losing all access to your balance for a very long period, hidden and/or extensive costs, or hidden risks that aren’t being directly revealed. Leave such “too good to be true” investments for people who are actually skilled investors – and they probably won’t be investing either.

Instead, most investments beyond a savings account or a CD offer potentially strong gains coupled with risk. That’s just part of the equation. What usually happens is that the better the estimated returns on an investment, the greater the risk.

Let me spell it out for you in detail using a specific example. The Vanguard 500 is a long-established index fund that essentially invests in 500 of the largest publicly traded companies in the United States. If you look at the returns on this fund, you’ll see that (for the quarter ending June 30, 2010) money invested in the fund has earned 14.33% over the previous year. That’s a very nice return.

At the same time, though, money invested in the fund has earned an average of -9.84% the last three years. Yes, each year (on average), an investor has lost almost 10% over the past three. Even over ten years, the average is -1.67%. Over the lifetime of the fund, though (since the mid-1970s), money in the fund has returned an average of 10.10% per year.

So what does that mean for you? It means that over the course of some years, you’ll have a 15% positive return. Other years will have a -30% return. Over some decades, it’ll average out to a nice positive – 10% or so. Over other decades, like the ’00s that had two economic downturns, it’ll average out to a very low positive or even a negative.

Sometimes you can afford that kind of risk. If you’re many, many years from your goal, that kind of risk is fine. If you’re 25 and investing for retirement, you’re going to get enough great years between now and retirement that you’re pretty likely to make up for the losses of the bad years. The key is to just ignore the year-to-year losses and gains and just be patient.

However, if you’re closer to your goal, you can’t afford that kind of risk. If you’re saving for a goal that’s going to happen in five years and you need to have the balance you’ve already saved up, you’re making a big mistake to put it at this kind of risk. You need to keep it safe, even if you’re losing the potential to have a big year.

You also have to look at your debts in comparison. Right now is a great time to pay down debt. Why? The “return” you get from debt repayments is equal to the interest on that debt. So, if you have a debt that’s costing you 8% interest, an early payment on that debt essentially earns a guaranteed 8% return. Why? If your balance is lower (and that’s what an early payment does), the lower balance will generate that much less interest that you’ll have to pay. It’s important to note, of course, that actually acquiring new debt is really, really bad – I’m looking at debts here as water under the bridge and merely a problem to be solved.

Also, you can never, ever have too much money put away for retirement. It is never bad to over-save for retirement, because you can always use that money during the early years of your retirement for whatever things are most important to you knowing that you’re secure for life.

Thus, here would be my very general suggestions for someone with a chunk of money to invest.

The first thing I would do is aim for debt freedom. Why? Paying ahead on debts is probably the best stable investment that people have right now. Get rid of your debts – all of them.

If you’re debt free, I’d sit down and look at my life goals. Are there any big goals that I want to achieve in my life? Am I going to buy a house? Do I want to start a business, or launch a new career? Maybe you’re really happy with how things are right now. If you have a strong overriding goal, keep the money in savings and have it help you reach that goal a lot sooner. Most likely, the goal will be short term enough that you shouldn’t put it into stocks or other risky investments, for the reasons discussed above.

If you don’t have an obvious overriding goal, open up a Roth IRA and put the money in there. A Roth IRA is a simple retirement account that anyone can open – you just sign up for one with an investment house like Vanguard, much like signing up for a savings account at a bank. You put money in the account from your checking account, then tell the investment house how you want the money in the account to be invested. The best option for most investors is a Target Retirement fund that matches your estimated retirement date. You can contribute $5,000 a year to a Roth IRA – if you have more than that, put it in a savings account and make contributions each year.

There are two things that people virtually never regret: freedom from debt and plenty of money saved for retirement. If you have money just sitting around, you’ve got two good things to do with it, right there.

A final tip: read. Pick up a well-regarded book on investing (here’s my pick) and read it at your own pace. Go slow and make sure you understand every sentence. Use Wikipedia and Google to help you understand terms. This is perhaps the best thing you can possibly do with your time as a beginning investor.

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  1. Shannon says:

    Your comment that “you can never, ever have too much money put away for retirement” is ridiculous. The point of life is the journey as much as it’s the destination and I’ve seen quite a few folks who’ve been obsessed with saving for retirement at the detriment of living and enjoying their life on their journey towards retirement. Balance, like everything in life, is the key.

  2. Trent, your last paragraph sums up the entire post perfectly and it was the very first thing that came to my mind as I made my way through it: Pick up a copy of “The Boglehead’s Guide to Investing”, read it, and learn from it. For a new investor, there’s simply no better resource in my opinion.


  3. Hannah says:

    @Shannon, that statement is by no means ridiculous. All Trent is saying is that having more money than you strictly needed when you retire will not hurt.

    If people allow their obsessions with savings to affect their happiness, then the obsession is the problem, not the accumulation of a lot of savings. You’re taking Trent’s words totally out of context.

  4. SEC Lawyer says:

    Without question, debt eradication is key. In my judgment, it’s the ONLY use of free cash after tax-deferred investments (401Ks and IRAs) have been fully funded. This is true even during an inflationary environment in my experience. It’s undeniably true in a deflationary one (such as we may have right now).

    After you’ve paid off all debts, including mortgage(s) and any personal loans, then and only then you can start thinking about how to invest free cash.

    Of course this leaves open the question how you should invest tax-deferred funds. So, where should you put your 401K and IRA money?

    I’ve been working in the investment field for 30 years and yet I find the correct answer to that question elusive. One possible answer is a carefully-selected target-date mutual fund.

  5. starshard0 says:

    @Shannon, I’ve found that as long as I have a job I’ll never be truly happy. Knowing that I have to get up early to go someplace I hate being kills me inside a little bit everyday. Spending money on things is not going to make myself happier. I’ve found that the one thing that truly gives me happiness is devoting as much of my income towards early retirement as I can. The sooner I stop working, the sooner I can start enjoying life and experiencing the REAL journey.

  6. Dan says:

    I suggest that your readers download the paper titled, “A Quantitative Approach to Tactical Asset Allocation” that is available from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461. The paper describes a simple moving average timing system that uses asset class relative strength to allocate investment funds. Using “relative strength investing” as a search term in an internet search engine will generate additional information on pros and cons of this investment approach as well as providing related strategies for consideration.

  7. Robin Crickman says:

    Is it really true that anyone can open a Roth-IRA? I thought you had to have “earned” income. There are small businesses running just now that are not providing any earnings; the owners are “living off of depreciation”. What sort of tax-protected investment for retirement is available to people in that situation?

  8. Lisa says:

    Wow, perfect timing. I hit your url to search your “archives” for the article you wrote- TODAY! My question: when you say pay off debt, would you include a mortgage? I have no other debt. I’m 42 and have a fantasy retirement age of 60. I work for a labor union w/ a defined benefit pension. I have about 25K free to invest. So Roth IRA is your #1 pick? And I should put in 5K by the end of 2010?

  9. One good benchmark to go by is the younger you are, the riskier you can afford to be.

    Your portfolio can recover from short term fluctuations in the markets when you’re younger.

    I’m middle aged and plan on keeping my portfolio as aggressive as possible at least till I’m 55.

  10. deRuiter says:

    To fund a ROTH or regular IRA you must have EARNED income. You can get a part time job to earn enought to contribute the $5,000. (or $6,000. if you’re a ‘senior’ over a cetain age, perhaps it is over 60, don’t remember.) You could buy a great antique duck decoy at a yard sale and sell it for a $5,000. profit and fund your ROTH for a year. You could collect aluminum beverage cans and declare the mney you earn selling the cans as income and put that into a ROTH. Interest doesn’ count, passive income doesn’t count. It’s worth it to get a part time job delivering pizzas a couple of nights a week to fund that ROTH.

  11. Andrew says:

    @deRuiter, currently you can contribute up to $5,000 until the age of 50. After that, you can contribute an additional $1,000 per year.

    I would definitely agree that paying down debt right now is very important, especially considering it is hard to find yield anywhere. However, if you do not need the money you have allocated to investments in the next five to ten years, don’t be afraid to look at alternative investments. For years, modern portfolio theory has preached diversification, but that extends beyond just holding equities from different sectors. You need to diversify amongst several different asset classes, including exposure to stocks, bonds, commodities, currencies, and even real estate. You can do this through ETFs nowadays, or if you have enough capital, invest directly.

    Don’t be afraid to investigate products such as long/short funds too if you meet the qualifications. A lot of these “risky” investments have had a more consistent appreciation over the past few years than long only mutual and index funds.

  12. Rob Bennett says:

    Investment risk is both wildly exaggerated and wildly underestimated at the same time. What many are trying to do is to find a single stock allocation that will work at all times. It doesn’t exist! When stocks are insanely overpriced (as they have been since 1996), they always provide poor long-term results. When stocks are reasonably priced (as they will be after the next crash), they always provide great long-term returns.

    Many look to those employed in The Stock-Selling Industry for advice. This is a mistake. The Stock-Selling Industry is all about selling stocks. You need to look for more independent sources of information on how the stock market works.


  13. Surfboard says:


    Good article. Perhaps the parts where you talk about negative numbers could be better expressed as “negative 10%” rather than “-10%”. When the line breaks, sometimes the “-” is left on the previous line, so on the next line it looks like “10%”.

    Also, when you use the “-” as both a negative and a clause separator, you can get confusing statements like this: “Other years will have a -30% return. Over some decades, it’ll average out to a nice positive – 10% or so.” It took two readings to see that you weren’t exposing -10% as a “nice positive”.

    Thanks for the article.

  14. Andrew says:

    Building on what Rob said, as a licensed broker myself, I would strongly recommend a new investor do as much self study as possible and avoid the high fees and commissions you will pay at a full service broker/dealer. Find a good, online, discount broker that will charge you under $10 a trade (you can find many for even less, but make sure the broker is reputable).

    Don’t be afraid to break the “traditional” investment mold either. Putting everything in mutual funds or index funds and then hoping they go up is NOT an investment strategy despite the fact that this is what the majority of the unsophisticated public do. You would have had no growth at all over the past decade with this strategy even before inflation is taken into account. And there is no guarantee that this will change. Interest rates have no where to go but up, which is historically bad for equities.

    No one can predict the future, but one can find favorable risk/reward setups in the markets that limit your risk, which is what successful trading/investing is all about. I strongly recommend anyone new to investing read the following books to get on the right path (there are some more advanced ones out there too for when you are ready).

    Secrets for Profiting in Bull and Bear Markets-Stan Weinstein

    How to Make Money in Stocks-William O’Neil

    Winning on Wall Street-Martin Zweig

    Trend Following-Michael Covel.

  15. Christina Crowe @ Cash Campfire says:

    Great information. I’ve been thinking about investing my money for retirement. I also need to save for a house. At the moment, my money is just sitting in my savings account until I figure out what to do with it.

    I agree that you should work on getting rid of debts first before anything else. Very sound advice.

  16. There are two types of investments with a guaranteed return. They are:

    1. Investing in your own debt(in other words reducing and eventually eliminating your debt. In my opinion that’s where you start.

    2. Financial Literacy/Education. Properly educated you won’t be at the mercy of the entire financial industry. It is a daunting task but does provide one of the best returns on time and energy expended.

  17. FinCar says:

    Getting into investment takes a great risk of whether or not you will have the returns of your investment. The possibility relies mostly on your capability to perform a great operational management. If you dedicate the most of your time and effort then you would accomplish the best result. Its always a matter of dedication and hardwork that brings you the potential gains.

  18. Landon says:

    Bogleheads is a great book, I highly recommend it also!

    I like the rule of thumb to own a percentage of your equity holdings in bonds equal to your age. In other words, if you are 35 years old you should own 35% of your holdings in bonds with the other 65% being in low cost index funds. In that way, you are lowering your risk as you get older.

    I am still back and forth about whether there is value in active investing. I might set aside a little money next month to play the stock market with a designated strategy such as Buffett-style value investing or the Motley Fool strategy. I’m only 29, so I have a little tolerance for risk.

  19. The advice in the article is excellent. It seems to boil down to educate yourself and be mindful of the risks inherent in each investment you make. I love the recommendation to spend some time with some key books. Being an aficianado of mutual funds, I like a couple of books by John Bogle, the founder of Vanguard: Common Sense on Mutual Funds, and The Little Book of Common Sense Investing. As the creator of the first index fund, Bogle presents the case for them. One should include them as part of a portfolio of mutual funds.

    I want to make the case for actively managed funds as well. Thereis a very good rationale for positing that past performance can identify funds likely to outperform in the future. Actively managed mutual funds are decision-making machines. Their decision-making capability is the bottom line result of people, processes, approaches, and tools that they use every day to make decisions. Good machines are more likely to make good decisions than bad machines. This capability to make consistently good decisions can be inferred from past risk, return and persistence behavior. Persistence is the tendency of a fund to exceed S&P500 return at lower than S&P500 risk. A tool that provides this analysis is available at http://www.FundReveal.com and a free trial is available.

  20. Dean G. says:

    Great article!….Be you own Investment Advisor…educate yourself…stop listening to the News

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