For about 98% of people, the best stock investment in the stock market is not a Google or an Apple for 2011 and going forward. In fact, your best investment in stock is not an investment in any single company. Here’s how to avoid a loss from owning the right company at the wrong time.
There’s a thing called “specific risk” that’s been a part of the investment world since the beginning of organized markets; and will still be around in 2011, 2012, and well into the future. It’s a risk the average investor in search of the best stock investment can easily avoid, so let me describe it by way of example. The year is 2011, and you’re hot for the stock market, favoring large growth and technology companies. You buy what you think is the best stock in the sector.
A while later there is both good news and bad news. The market soars, led by the growth and technology sector. The bad news: your company comes out with bad news and the stock falls out of bed. If you play the market long enough this WILL happen to you. In the above example you were basically right about the best investment for 2011. You just got too greedy by being too SPECIFIC. Let’s look at what you could have done differently to make instead of lose money.
The stock investment barometer or benchmark for large growth and technology stocks is the NASDAQ 100 index, which tracks 100 of the largest non-financial securities that trade on the giant NASDAQ Stock Market. This market rivals the New York Stock Exchange and Google, Apple, Microsoft, and many other great corporations trade on the NASDQ (say ‘naz dack’). Your best stock investment for 2011 would have been an exchange traded fund that simply tracks the NASDAQ 100 index, stock symbol QQQQ. This way you would automatically include the three great companies above plus 97 others in your investment portfolio.
By owning part of an exchange traded fund vs. a single company specific risk is taken out of the picture. There are hundreds of different funds to choose from and many of them are stock investments. For example, symbol SPY tracks the S&P 500 index which includes most of the truly major corporations in America. If you’re interested in gold or silver your best investment might be GLD or SLV, also exchange traded funds. All of them trade on major exchanges, just like Apple, Intel, and IBM do.
The best stock investment for 2011 and beyond for the average investor in the market takes the form of an index fund. If you don’t want to invest in the stock market itself your best alternative would be in the ever popular form of mutual funds, specifically of the stock INDEX variety. Either way, you can cut risk and costs by owning part of a diversified portfolio.