OTHER STOCK INVESTMENT ALTERNATIVES

by Ernesto R. Martin

AGGRESSIVE INVESTORS. With the enormous gains by high-tech mega companies up to 2024, the tech-heavy NASDAQ 100 Index has recently exhibited performance superior to the S&P 500 Index; because it's less diversified (100 companies instead of 500) it has greater volatility, but aggressive investors who think artificial intelligence may push high-tech companies even higher may wish to divide their money between a NASDAQ 100 index mutual fund (I like the QQQM index fund because of its lower fees) and a traditional S&P 500 index mutual fund.

CONSERVATIVE INVESTORS. A second choice is the opposite, and it's for those who think the enormous recent gains by high-tech companies may lead to a bubble about to burst. Such investors may wish to invest more of their money in the "equal-weighted" S&P 500 index mutual fund and less money in the traditional S&P 500 index mutual fund which is heavily weighted to the high-tech mega companies.

ULTRA-CONSERVATIVE INVESTORS. A third choice, for even more conservative investors who think that the traditional S&P 500 index funds have become too expensive because of their popularity (i.e., hard to justify based on the anticipated long-term profits of the component firms) and that they ignore the thousands of smaller U.S. firms, is to divide the money between an "equal-weight" S&P 500 index fund and an index fund (like a Russell 2000 index fund*) that tracks smaller companies ("mid-cap" and "small-cap" firms); this also adds to diversification.

SCHEMES BY OTHERS. There are other options for investing in a diversified group of stocks, some requiring more work on your part. One would have turned an $11,000 investment into more than $1 million over a 17 year period ending in 2004, but has done poorly since then and its author now recommends that you invest in an S&P 500 index fund. Another divides your investment equally into four index funds that invest in different size companies. A third invests in 10 companies adjusted at the start of each year and has had a cumulative return considerably greater than that of the market. All three are described here if you wish to explore them, not necessarily as a substitute for S&P 500 index funds but perhaps to put a larger portion of your investment in such funds and a smaller portion in one of these schemes.

FOR MORE INCOME. For those who would also like their stock investments to generate more income, my recommendation is that they put some in the two S&P 500 index funds and some in what are called The Dogs of the Dow; for more on this, please go here.

_____________________
* Although the Russell 2000 lagged in the 2020 - 2022 period, it's done well in the year to 8/31/2024 (18.5% return) and in the 10 years to 8/31/2024 (8.2% average annual return) when compared to CDs, but poorly compared to the S&P 500 (12.15% average annual return over the last 10 years) which has been driven by the high-tech mania. However, it adds investments in 2,000 additional companies for diversification and some analysts believes it's poised to excel beyond 2024, especially if the artificial intelligence boom becomes a bubble. I like Fidelity's FSSNX index fund because of its lower fees.