Sunday, May 19, 2013

Picking stocks

Harvard economist Greg Mankiw has a great column today in NYT regarding what stocks he should by.  Economists get this question all the time and Mankiw's answers are noteworthy for being solidly based on economic research.  Here is a quick, high-level summary:
  1. Markets always know more than you do.  So unless you have inside info or you see things no one else sees, you should realize your insights are priced into the market's valuation.  Buy index funds to save costs. 
  2. Many price moves cannot be explained, even after the fact.  Deal with it.
  3. You better own some stocks.  All the research shows that they outperform other assets over the long haul.  
  4. Don't put all of your eggs in one basket.  Folk wisdom and high-powered econometrics yield the same conclusion.  
  5. Think global.  The US represents slightly less than half of total global valuation; get yourself some EU, Japanese and emerging market stocks.  
I have followed most of this advice, although I must admit my global exposure is a bit out of balance.  Mankiw recommends Vanguard's Total World Stock exchange traded fund FWIW.

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