I had a friend growing up. Let's call him J.P. It's short. It's catchy. It rolls off the tongue, and it's a breeze to type. It was, after all, his name. I had a lot of smart friends growing up -- OK, now that's just a lie. But J.P. was smart.
J.P. went away to school. He did the things that students do -- drank beer, I suppose, and slept a lot. One day, J.P. built a machine that could extrude plastics capable of surviving in outer space or at impossible temperatures here on Earth. I'm giving you a sense of how smart J.P. was.
Now I give you "stocksandbonds"
Smart as he was, J.P. found himself at wit's end. "All the things in this world," he would lament, "can be divided into two groups." On one side there was all that he could know and understand -- just about everything. On the other, there was "stocksandbonds."
That, as the saying goes, explains everything.
It explains why otherwise smart, confident people -- real wahoos who would rebuild a vintage Hemi in their garage or raise tiny human beings in their homes -- shrink at the thought of investing their own money. Money earned, I might add, at jobs infinitely more complex than "stocksandbonds." It explains why an entire industry has sprung up to take control of that hard-earned money. It explains why smart people everywhere trust their life savings to insurance salesmen, investment advisors, financial "planners," and boiler-room telemarketers. It explains why there is a Motley Fool to begin with.
Give it to me easy
Sadly, we Fools may be making things worse. We are enthusiasts. Naturally, we assume that you are, too. That you are out there trolling for superior investment ideas, with an interest in P/E ratios and enterprise values. We assume you're obsessed when you may be more like J.P. Of course, J.P. could understand "stocksandbonds." The guy is a chemical engineer for Pete's sake. He simply never cared to. It doesn't interest him -- at least not to where you'll ever catch him discounting cash flows.
Maybe you look at investing the way I approach health. I go to the gym and try to eat right. But I'm no physiologist or dietician. I take vitamins, but you don't see me in the lab cooking them up from rose hips and mandrake. I'm all about good health -- I drink to it all the time -- but I can't stand the sight of blood.
Investing for lightweights
This may sound funny coming from a stock guy, but I've felt that way about investing myself. I just can't get excited about mature blue chips, for example. What will I ever contribute to an argument over the valuation of General Electric
Fortunately, there's a solution: mutual funds. That's right, I said it. Mutual funds. Have they taken a bad rap? Sure. Did they have it coming? Granted. But let's face it. You probably own them, and so do I. If you don't already, you will. This is good news. Because here's the thing: I do own GE and Exxon. I own Bank of America
I also own Spiders (the latter are easy to trade, the TransAmerica fund lets me invest regularly without transactions costs). Both give me large-cap growth. I also own a number of small- and mid-cap exchange-traded funds (ETFs), which give me exposure to the likes of Apple Computer
I like both, but this way I can focus my energies and my stock portfolio on what I know and understand best: small-cap upstarts and fallen angels.
Investing for Daddy and me
All of which brings me to an experiment in stock picking involving my co-worker Shana and her father. Our endpoint is simple: to see once and for all whether three ordinary Joes can make money buying stocks recommended in Motley Fool newsletters. For more, take a look at Daddy's No. 1 Stock Pick, but please hurry back when you're done.
So far, we've bought Daddy two stocks: in-your-face casual diner Buffalo Wild Wings
That's right, I bought a mutual fund. You can read the details in I'm Buying This One for Me, but here's the gist: Everybody needs some real estate in their portfolio, and I simply don't have the inclination to stay atop even a tiny portfolio of real estate stocks. The value guys at Third Avenue, on the other hand, do. I have no qualms letting them handle this one.
"Stocksandbonds" for dummies and smarties
A great thing about working at the Fool is that I get to talk stocks and bonds at work. When it comes to mutual funds, I chat most with Shannon Zimmerman, who shares my enthusiasm for Third Avenue. He's even recommended the funds -- including Third Avenue Real Estate -- to subscribers to his Champion Funds newsletter service.
It might surprise you to hear that the 24 funds Shannon has recommended have returned on average 10.3% vs. just 6.2% for the S&P 500. For me, this is just icing on the cake. After all, I look to make my big gains on my own. I use mutual funds and ETFs mostly for diversification and balance. For someone like J.P., however, this must seem almost too good to be true. Remember, most investors don't outperform the S&P 500 -- even market pros who are paid millions to fail year after year after year. It seems almost criminal that you can do better in just a few minutes a year, while knowing next to nothing about "stocksandbonds."
Here's why this is so important
Just for fun, I ran some numbers through an off-the-shelf present value investment calculator. I was surprised at what I found.
If you invest $500 per month for the next 30 years, you should end up with a tidy sum. Assuming a 10.5% return -- the historical return for stocks, though tough to get -- you'll have about $950,000 in 30 years. Not too shabby.
But what about if you could do a little better? What if you can manage to save 1% a year in expenses and juice your returns by just 1% per year? You end up with more than $1.4 million -- nearly half a million extra. This example is simplified and riddled with assumptions. But the point is a valid one, and here it is: A measly one or two percent -- either saved in fund management fees or gained in performance -- can make a huge difference over long periods.
Your easy way out
One way or another, you need to get that percent or two. If you think you might be a bit like my old pal J.P. -- if you would rather make a machine that does stuff than read balance sheets and income statements -- you might want to consider buying and holding high-quality, low-cost mutual funds.
Need help? Shannon is offering a special 30-day trial to Champion Funds. It's free. That strikes me as a pretty easy, very low-risk way to find out if a newsletter service is right for you. Click here to learn more.
Fool writer Paul Elliott owns none of the stocks mentioned (except in his mutual funds). The Motley Fool is investors writing for investors and maintains strict trading guidelines for employees. See the Fool's disclosure policy here.