It's easy to lose sight of the purpose of investing. Despite what CNBC might lead you to believe, investing is not about adroitly maneuvering in and out of the market on a daily, if not hourly, basis trying to beat the pros. The only one that gets rich when you do this is your broker -- ever wonder why brokerage commercials show people with home offices far nicer than yours?
The true purpose is instead much more pedestrian in nature -- as billionaire George Soros has been known to say, "If investing is entertaining, if you're having fun, you're probably not making any money." First and foremost, the purpose of investing is to preserve your hard-earned capital against inflation. And beyond this, it's to generate a respectable return.
So how do you go about doing this?
Most people think the way to do so is to pick great stocks. I would agree, with a caveat.
Picking individual stocks that don't put your capital at undue risk while also offering a reasonable return is hard. Anybody who leads to you believe otherwise has no idea what they're talking about. What do you think the world's greatest investors do all day? Here's a hint: They don't have day jobs -- or, rather, their day jobs revolve exclusively around investing.
It's easy for people like Peter Lynch, the longtime manager of Fidelity's Magellan Fund, to proclaim that you should "invest in what you know," or for Warren Buffett, the greatest investor of all time (click here to see Buffett's 10 largest stock holdings), to quip that you should "be fearful when others are greedy and greedy when others are fearful," but the fact of the matter is that these guys didn't get rich by following cliches. They got rich by spending countless hours studying the companies behind the stocks they invested in -- or, perhaps more importantly, didn't invest in.
With this in mind, here's something else Lynch has said: "If you don't study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards." I don't know if you play poker, but your odds aren't very good if you don't know what's in your hand.
If you nevertheless want to go down this path, subscribe to our Stock Advisor newsletter service. That's a shameless pitch, I know. But hear me out. It's run by demonstrated winners who, as far as I can tell, spend the vast majority of their waking hours reading up on, researching, and thinking about great companies. And they have the results to back it up. Since starting the service in 2002, their picks have returned 105%, outperforming the S&P 500 (INDEX: ^GSPC) by 69%.
In the event you're not convinced -- and given my obvious bias, I couldn't blame you -- here's what I recommend: Buy index funds, and exchange-traded funds in particular (click here to read about the difference between ETFs and mutual funds). Over the long run, the broader market will go up. The United States is growing. Our companies will continue to expand their operations abroad. And stocks are resistant to inflation.
And, more specifically, gradually anchor your portfolio in a broadly based dividend ETF using dollar-cost averaging (buying an equal and predetermined dollar amount every month, quarter, or year). Perhaps the best in this regard -- and the one dividend stock you should own -- is the SPDR S&P Dividend ETF (NYSEMKT: SDY), which tracks the S&P High Yield Dividend Aristocrats Index. To be a dividend aristocrat, a company must be one of the 50 highest-yielding constituents on the S&P Composite 1500 Index and have increased its quarterly distribution every year for the past quarter-century.
Over the past five years, this ETF has beaten the Dow Jones Industrial Average (INDEX: ^DJI) by 23 percentage points. It's outperformed the Russell 3000 (NYSEMKT: IWV) by 21 percentage points. And it's done the same to the eponymous S&P 500, exceeding it by 11 percentage points.
Is this perhaps the most boring investment strategy you could follow? Yes. But that's the point.