Market Musings: Investing in the Stock Market or the Market of Stocks

On Wednesday, Barry Ritholtz’s Big Picture blog published his daily morning reads and i found the article, Inside the Market of Stocks, which is about the lack of outperformance in the past five and ten years of large-cap managers against their benchmark.

As the article states, on average stocks beat the market by a very small margin. On certain years this percentage of stocks beating the market can go as high as 66.5%, in 2001, and as low as 29%, in 1998.

What this article tell us, and it’s the same statement the author leaves us with at the end of the article, is that it’s difficult to predict when stocks will outperform. I like how the author ends the article:

The tricky thing of course is that we’ll never know in real time whether we’re investing in the stock market or the market of stocks.

– Michael Batnick

Some years it pays to be a stock picker and other years it will not, but the majority of years will bring a nearly break even. Not many professionals, if any, are skilled enough to predict these occurrences. That means nonprofessionals should try to pick stocks until after they’ve maxed out their retirement contributions into well diversified index or life-cycle funds.

After completing you retirement goals, then I still wouldn’t recommend investing in stocks for the majority of people. Most people will earn a better return by investing in mutual fund. If you want to invest in individual stocks then I recommend the homework that Jim Cramer recommends, which is an hour a week on each stock you choose to buy with a minimum of 5 stocks from different industries.

I don’t believe most people have the time an inclination to commit to this type of homework. So make life easier and less frustrating, and don’t stress yourself out about the day-to-day movement of the markets. Focus on your long-term goals and stay the course.