How do individual investors make investment decisions in practice rather than in theory?

Question

How do they manage their funds/savings/ investments in light of current stock markets? What do efficient frontier and optimal portfolios have to do with this assuming I can invest directly in the stock market and do not need any financial intermediaries like brokerage houses.

Answer 1

Unless you have a seat on the exchange you will need a brokerage.  I use Schwab.

Ive had a big cash position for a while and Im starting to deploy it in Financials, piplines, wind energy, technical, and mining.

I try to buy solid companies and ride the storms out.  I take a few flyers  to keep it interesting.

Answer 2

the whole efficient markets thing basically just says that the markets are efficient, and any new information that would affect a stock price is quicly figured and factored into the stock price, bringing the price back to equilibrium.  so what this means in terms of individual investors is that there's no point in trying to beat the market.  unless you have special or inside information, your best bet is to try and match market returns by investing in a low expense ratiod index fund.   you can google strong, semi-strong efficient market...it may have been miller modigliani's work.  i forget.

the only way i know to invest in the market w/out a broker is to buy from companies which sell their stock directly to investors.  not all companies do this.  but i think mcdonald's does, as one example.  you'd have to research it.

so in conclusion, invest in an index fund that has the lowest expense ratio possible.  t rowe price has a good one.

of course, you hsould be diversified, and optimum portfolios now would probably have some foreign stock indices in there, along w/exposure to real estate, and posibly fixed income.

Answer 3

I would venture a guess that individual investors have many different reasons for making their investment decisions.  I can only tell you about my own.  A lot of time--I know this will not sound too scientific--I go on hunches.  Other times I buy a stock in an industry to balance my portfolio.  For my IRA account I tend to go for stocks that pay non-tax advantaged dividends ie LPs and REITs.  Going to have to pay the full tax rate on the IRA anyway so why not?

I tend to prefer smaller cap to larger cap but I do like certain blue chips such as MMM and large caps do make up the majority of the portfolio.  

I do attempt to stay diversified including owning stock in foreign companies and also owning bonds.  

It is possible to invest without using a broker, but it is in my opinion not worth the added effort and some stocks that you might wish to buy you can not buy without a broker.

The most reasonable way to invest without a broker is to invest using no-load mutual funds.  Also some closed end mutual funds will allow direct investment.  

The time to buy is when stocks are on sale.  They are on sale now.  Of course the stock market department store might have a further mark down to clear out inventory.  That is one of the risks of buying on sale but even so it is certainly better than buying at list price.

The time to build cash balances is when there are no sales.  An interesting aspect of the stock market department store is that it will take back stock purchased on sale at the current list price.  Strange but true.