The most common question I hear from investors who seek my counsel— whether seasoned business professionals or kids with summer savings— is
What stock should I buy now?
At some point of course, you’ll need to answer that. But most people assume it’s the most important question to an investor. It isn’t. In fact, it's premature, and anyway the usefulness of even a well-informed response hinges on hundreds of events over the next several years, never mind decades. So the answer to What to buy changes constantly: no one can see the investing timeline future of a business, never mind of an entire fast-changing industry laid out on a global scale and over many years. Better questions are
Why am I investing? What am I trying to solve for?
Let’s unpack it. And by the way, even seasoned investors screw this up all the time.
Know yourself
Before adding anything new to your portfolio— a tech giant, a dividend aristocrat, a foreign retailer, crypto, a broad-market ETF, or even gold bullion— you need to know what kind of investor you are. Not the one you want to be: none of us gets to be Warren Buffett. Even assuming anything you buy will go up (false), different investments work better for different types. Choose the wrong kind and it can drive you mad even if it is a successful play.
- What specifically are you trying to achieve? College savings, a new boat, retirement ..?
- How obsessive are you: Do you check your portfolio weekly? Daily? Hourly?
- What is your risk tolerance? Do you panic-sell at a 10% drawdown?
- Do you have the discipline to rebalance (sell down a winner) when something goes ballistic?
Some people invest for growth. Some for income. Some just want to feel smart at dinner parties. Most of us are some cocktail of those. That’s fine. If you don’t know how you function through this process— i.e., if you are the kind who needs total financial security to sleep at night— then you’ll want to account for that when making your moves.
What’s your time horizon?
There is a world of difference between a 1 year and a 20+ year outlook.
If you’re stashing cash for a house down payment in a couple of years, buying fast growth stocks or crypto might feel both smart and exciting. But while you could hit the lottery doing that, you also have a 1-in-3 chance of seeing a big chunk of your investment vanish in that time frame.
If you're investing for retirement 25 years out? Then day-to-day market noise doesn’t matter. But you still need to have conviction in your strategy or you won’t stick with it when things get rough. And over a timeline that long, they will get rough. Markets correct. Recessions come and go. Pandemics. Wars. Elections. They all will rattle your confidence and you’ll be tested repeatedly. If you are clear and determined on your timeline, you won’t overreact to short-term gyrations in the market.
For more:
Risk Tolerance vs. Risk Capacity
Risk tolerance is how much volatility you expect you can handle. Risk capacity is how much you can afford to handle. Your age, income, job security, other assets— it all affects your capacity for risk. Ignore it and you're gambling with higher stakes than you realize. You might think you can manage your impulses in the face of a 40% drawdown. But if you have to pull money out to cover a tuition payment or a spouse’s medical bills, that pullback goes from being just a red number in your brokerage app to causing real pain.
Also worth noting: risk tolerance is a moving target. Investors generally get more aggressive in bull markets and more skittish in bear markets. That’s human, but it’s also a blueprint for buying high and selling low.
Are you an Investor or a Trader?
There’s nothing wrong with trading— if you know that’s what you’re doing. If you buy Nvidia at $144 and sell a couple of weeks later at $160 because “AI feels overpriced,” you’re not investing. You’re trading.
Traders think in minutes, hours, days. Investors think in years or decades. You can do both, but not with the same money and not for the same goals. Define the role you’re playing before you hit Buy.
Don’t Confuse Activity with Progress
I spent years tweaking allocations and specific selections chasing better returns, looking for “what’s working now.” Over the years, I’ve been lucky more than once. But what works best, and most consistently and for the vast majority of investors, is buying broad market funds—exchange traded funds (ETFs) like SPY and QQQ— and holding them for long periods through the chaos. You can tune out 95% of the financial media and find astonishing success. And with the magic of compound interest, the longer you hold them the better you’ll do.
The temptation to tinker with your portfolio is incredibly strong, especially in an era where TikTok and Instagram are spewing hot takes and every finance bro wants to give you a tip and your gamified brokerage app gives you digital confetti for buying and selling. (They’re not trading rewards— they’re entertainment. Investing well should be pretty boring.) It’s all for a payoff in distant future. Don’t use your portfolio for a dopamine hit. Set it and forget it.
Allocation > Selection
By the time you get to the question you originally asked, What to buy?, the answer becomes a lot less impactful. Sure, you could stock-pick your way to glory. But there is an entire industry of professionals armed with complex algorithmic models and astounding computing power and even insider data trying to do exactly that. You lack these advantages. You have different advantages and you might even possess rare skill and could choose a number of fantastic performers. But the truth is, rather than searching for a needle (the next Nvidia, etc), it makes far more sense to buy the whole haystack (an S&P 500 index). Then sit tight and wait.
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More or less the S&P 500 from the Revolutionary War to Covid 19 |
Buying a broad index fund means you get most of the biggest and best by definition. And their outperformance of other stocks means your holdings rise. So whether you hold Apple or Microsoft or Meta individually becomes not only a moot point but redundant, because you already own them.
In fact the more important issue is how much of your portfolio is in stocks at all, vs. bonds or cash or treasuries or real estate or gold, or alternative assets like fine wines or art. The allocation of your holdings and the time you let them grow are the critical ingredients to future success. By and large, stocks rise more, over a longer period, than other assets.
The Right Question
So what should you buy? It depends. And if you’re like most people, it changes every few years or more, and it might not matter in the long-long run. Instead, ask
- What am I investing for?
- How much volatility can I handle?
- How long will I hold it if it goes up? How long if it goes down?
- Is there an easier way to ensure success?
Take a breath. Ask the right questions. And build a portfolio you can live with.