Have Fun Toting a Bagful of Stocks
There's more to life than mutual funds.
Brett Burkey assigns the book A Random Walk Down Wall Street to his high school economics students in Boca Raton, Fla. The author of the financial classic, Princeton University professor Burton Malkiel, strongly believes that stocks are the best choice for long-term investors. But he advises readers to use mutual funds, preferably ones that track a market index. Stock prices behave randomly in the short run, Malkiel contends, so to stay out of trouble, you must be well diversified. That's tough to do with individual stocks, he argues, unless you've got bundles of money.
Despite having read A Random Walk many times, Brett has taken up stock picking as a hobby, along with golf, distance running and singing in a rock band. Brett, 45, spends up to an hour a day monitoring 16 stocks worth a total of $60,000. He says he can handle the risk because he won't need the money for 15 years. Moreover, Brett, who is married and has no children, will collect a teacher's pension and has $200,000Ñand countingÑin his 403(b) retirement plan, all invested in funds.
Brett takes stock selection seriously. He uses the Value Line Investment Survey, follows company and industry news, and reads financial statements. "I feel like I have a plan," he says. His holdings tilt heavily toward health and financial-services companies that should benefit as affluent baby-boomers age.
Ups and downs. All told, however, Brett's picks have earned him a mere 8% over the years. Despite the sluggish results, his current stock holdings are not unattractive. They include two big winners: Prudential and Starbucks. He also holds Amgen, Caremark and UnitedHealth. The stocks have sagged lately but all are quality companies -- indeed, Brett is considering adding to his positions in Amgen and UnitedHealth. His one foreign stock, Mexican cement giant Cemex, is up almost 20% since he bought it last September.
But with Malkiel's theories echoing in his classroom, Brett can't help wondering whether he should dump his stocks and switch to index funds. Nowadays, financial advisers tend to steer investors away from individual stocks. When we recently asked 30 advisers how they would help a young California couple manage their $500,000 gain from a real estate sale, the experts agreed that 70% to 80% of the money belonged in stocks for long-term growth. But not a single adviser recommended that the couple buy individual stocks, not even with part of the money.
Permission granted. If Burton Malkiel were in Brett's shoes, what would he do? You might expect he'd advise Brett to quit playing in stocks and rush into index funds. But the professor, perhaps surprisingly, gives the teacher a permission slip to stay the course. "Picking stocks is fun, and I do some of it myself," Malkiel told Kiplinger's. "But I can do so because my retirement fund is broadly diversified with low-cost index funds. So if Brett has a secure and adequate retirement fund, I say go ahead and have fun."
Brett concurs. "This is a very enjoyable part of my life," he says. And whoever said investing shouldn't be enjoyable? Not Burton Malkiel. And certainly not the Portfolio Doctor.