[jluetjen]

I never really "got it" in regards to investing until I had an absolutely top-notch FI prof at BU during my MBA. (Disclaimer, I'm not an investment advisor, financial analyst or anything like that, but a salesman. So any investments that you make are your problem, not mine!) OK, Long story short....

1) Unless you have essentially unlimited time and access to information, stay away from individual stocks. (Unless you like to do it as a hobby, but then you'll need to include your losses as the cost of the hobby). The best bang for the buck as far as risk and return is index funds (for example an S&P500 Index fund). Just keep an eye on the costs so that you're not paying too much.

(Exception, if you work at a company which has a discounted stock purchase plan based on the lower of either the 1/1 or 12/31 price, with immediate vesting of your purchase and no black-out periods, buy as much as you can. Even if you sold the stock immediately after receiving the shares, you'd have made 2x the discount off the bat. Just make sure that you don't have too much of your investments in that one stock, so bleed some off periodically and roll it over into your other investments.)

2) When it comes time to diversify, look at adding some small or medium-cap index funds, or foreign index funds. You can also look into REIT's for a real estate component.

3) As you get closer to needing to use the money (ie: retirement age for a lot of people) start to shift the percentages so that you start to have a growing share of your investments in bonds so that you'll be less at risk for changes in the market.

Given the amount of energy and resources that go into investments nowadays, it reminds of a quip made by the aforementioned professor describing the "Chicago School of Economic" attitude towards stock picking:

If you see a $20 bill on the floor, don't bother to bend over and pick it up since it probably isn't real

I've come to the same conclusion about investing. An example of why the "average" guy can't really get ahead in the long run:

A number of years back I bought a "Nordic Track" ski machine for excercising (Great machine BTW, I'm on my second one now 15+ years later). I needed a part for the machine and found that they had excellent after sales customer service to compliment their presales service. I researched the company (CML Group) and they had good financials and things like an expanding product line and were advertising on TV constantly. They were also opening up new in-mall stores. So; Good product, service, financials, growing company. I bought about $1000 worth of shares for my portfolio at 21 1/8 in February of 1994 and watched them going up. I recently happened to find this review of the company from another investor from about that time.

When Alan B. Bond bought a Nordic Track fitness machine three years ago, he liked the product so much he bought the company. Well, actually, Bond, the president and chief investment officer of Manhattan's Bond, Procope Capital Management, picked up shares in CML Group Inc., the company that manufactures Nordic Track. CML, which also owns the Nature Company chain of retail stores, was one of Bond's picks for the BE roundtable. As for its performance? It was a muscle-bound success, spiking 70%, from $23 to $39.

"It's always good to have experience with the product," says Bond. Millions of health-crazed Americans like Bond have helped make Nordic Track one of the hottest-selling fitness machines. Even cheaper clones couldn't knock this CML product off balance. Not surprisingly, Acton, Mass.-based CML hopes to repeat its U.S. success in Europe.

Here's what another investment article from that time said:

Names like the CML Group Inc., which makes the Nordic Track. We see orders for their exercise equipment increasing at a rate of about 60%. And I think they're probably goind to exceed most analysts' expectations in the coming year. Both CML and Stride Rite are selling at below-market multiples, which is new for me.

Great minds think alike!

I'm a buy and hold kind of guy and things were going well. After not checking the stock for a few weeks prior to my wedding, I picked up a newspaper during my honeymoon and checked the stock. The stock was down around 9 7/8!

What!!!!!

I did some searching and discovered that the patient on the Nordic Track ratchet mechanism had expired. How was I to know that? I figured that I (and other individual investers like myself) are just there to be left holding the bag for the professionals. I eventually sold out at 10 1/4 in November '94. It's lucky that I did. Here's (as Paul Harvey used to say) the rest of the story...

In 1998 the CML-Group sold off Nordic Track and filed for bankruptcy protection, its stock price plunging. CML's days as a darling of Wall Street were over. The television ads that sold millions of Nordic Track machines no longer worked. Their stock, which had once hit $30 now trades on the OTC market for $0.35

A few years later I was sitting in a meeting with the treasurer of my company and we were chatting about investing and I mentioned my experience. He said "CML? That's Charles M. Leighton. He's got a nice big sail boat moored up in Salem". I figure that I paid for some of the deck hardware on that sailboat.

But if you want to do it the hard way and pick individual stocks, be sure to get a good education in portfolio management, risk management and the other stuff mentioned above before you sink your life's savings into it.