Latest news with #index funds
Yahoo
30-07-2025
- Business
- Yahoo
A self-made millionaire says he doesn't believe in index funds — and explains why he doesn't see options as higher risk
Jason Brown rebuilt his wealth through options trading after early investment losses. Brown's skepticism of traditional investing led him to focus on self-directed options. He emphasizes understanding options to mitigate risk and protect financial assets. Jason Brown built wealth his own way. After a disappointing early experience handing over his money to professionals — he took $2,000 worth of high school graduation money to the bank to invest and, two years later, his account had dropped to $700 — he decided if he was going to lose money, at least it would be on his own terms. As a college student, he started buying stocks and grew his modest savings to six figures before losing it all on one trade. After selling his car, moving back home, and taking a job at Verizon selling cellphones, he started trading again — this time, with a set of investing principles that would prevent him from going broke again. Brown, 43, gradually rebuilt his portfolio and hit the seven-figure mark by trading options. Business Insider confirmed his net worth by reviewing an account summary that shows his 2024 investment activity. An option is a type of financial contract giving you the right, but not the obligation, to buy or sell an asset at a specific price before a specific date. Options are generally more complex than traditional investing, such as buying and holding stocks or index funds, but Brown's adamant that traditional investing doesn't cut it. "I don't really believe in index funds," he told BI. He became skeptical after digging into his 401(k) plan when he worked for Verizon. Specifically, he looked at the fund his 401(k) money was invested in. It was comprised of about five major companies like Apple and Google that he knew and trusted, but "the rest of it was junk," he said. "That's when I was like, I want to move it over to a self-directed IRA, and I just want to pick these five companies. Why are they forcing me to buy all this other stuff?" Index fund investing has helped many regular investors build wealth, but for Brown, who prefers to be more hands-on with his investments, options trading made more sense. 'Options are not risky. The way people use them is risky.' Brown, who trades full-time, runs a financial education company, and is the author of "Five-Year Millionaire," believes there is a lot of misunderstanding around options trading. "When people don't understand options, they'll say, 'That's risky what he's doing.' The reality is, it's risky not knowing how to use options," he said. Stock options can be compared to renters' or car insurance, depending on whether you're buying or selling options and whether you're using calls or puts. For example, buying a put is like buying car insurance. You pay a premium (the cost of the put), and hope nothing bad happens (the stock doesn't crash), but if it does, you're protected: You can sell the stock at the agreed-upon price (the strike price), just like insurance would reimburse you if your car gets totaled. "If options are so risky, then stop paying your homeowner's insurance or your car insurance, because that's what you're doing every month when you cut a check: You are buying a put option to protect yourself in case something happens," said Brown. "Why don't we buy protection for our investment accounts when a COVID-19 happens, when an '08 real estate market crash happens, when a tariffs situation happens, and the market tanks?" Options can require careful timing and market-watching, and Brown knows he won't make money on every trade. "You cannot be right on every trade," he said, which is why he has a robust emergency fund, multiple revenue streams, and follows investing principles, including: Know your "I'm wrong level." When he lost everything in his early 20s, he never considered his "I'm wrong level," he explained. "I only thought, 'What would happen if this goes right? I'm getting a condo.' I never stopped to think, 'If I'm wrong, I'll lose it all and I have to move back home.'" Now, he knows exactly when he needs to cut his losses and shut down a trade. "Options are not risky. The way people use them is risky," said Brown. "You can use them to gamble and treat it like a casino, or you can use them to protect some of your most valuable assets — protect your accounts and grow your accounts." Read the original article on Business Insider
Yahoo
25-07-2025
- Business
- Yahoo
Novice investors are told to stick with ETFs, but one market legend makes the case for stock-picking
Many experts advise retail investors to focus on index funds for safe, steady returns. But Rob Arnott encourages new investors to try their hand at stock picking to get experience. He said it can shape investors' behavior down the line for the better. Earlier this week, I had lunch with Rob Arnott, the founder of Research Affiliates and the sort of godfather of alternative stock-market indexing. I was telling him about a recent story I wrote for younger investors about how much of their portfolio they should have in ETFs versus individual stocks. The takeaway from the story, based on chats with four financial professionals, was that retail investors should simply stay away from the idea of stock picking altogether and have virtually all of their equity holdings in index funds. The competition, they said, is too steep, and the necessary research takes too much time. Plus, even the pros have a hard time beating the market; just 15% of funds beat the S&P 500 over the last 15 years, according to SPIVA data. Arnott said it wasn't bad advice. But never one to go completely with the consensus, he also pushed back and made the case for why young investors should actually have a go at stock selection with part of their portfolio if they want to — not for the potential returns but for the learning experience. "They should dabble a little bit," Arnott said. "Enter into it expecting to do worse than your ETFs. View it as tuition." Investors can learn a few lessons in humility from taking a few swings in the market, Arnott said. Sure, humility is a great quality for navigating life in general, but Arnott said it can be particularly helpful in investing when it's learned early. For instance, it will expose blind spots in what you know about a stock and markets. It will also reduce the tendency to chase recent outperformance, and teach you to challenge prevailing narratives. "They're more likely to develop a respect for patience," he said. "They're more likely to develop a disdain for relying on recent performance to make your decisions. What's done best in the last three years often is among the worst in the next three years." The financial experts I interviewed for the aforementioned recent story said that if an investor really wants to pick individual stocks, they should only designate around 5% or less of their portfolio to doing so. But Arnott said it's fine if you want to go bigger. "I think the 5% threshold for most young investors is going to be too small to even bother," he said. "I mean, a newbie with $10,000 — what are you going to do with $500?" Still, there are fractional shares these days, and investors can keep their bets — or their tuition, as Arnott puts it — as small as they want. Once an investor builds up $40,000-$50,000, capping their individual bets at something like $10,000 and having the rest in ETFs isn't a bad approach, Arnott said. While his advice on stock picking isn't as conservative as what you'll hear from a financial advisor, Arnott doesn't support a risk-on approach in every sense. In fact, at the moment, he said it's probably smart to have a higher-than-normal allocation to bonds given how elevated broad stock-market valuations are. The S&P 500, for example, should deliver lower than 1.5% average annual returns in the next decade, he said, based on the historical relationship between starting valuations and subsequent returns. Within stocks, some cheap areas of the market include international and emerging markets value and small-cap value, he said. For those who plan to buy-and-hold for multiple decades, however, index funds are probably still the best approach. If you want to have more of an active hand in your portfolio and rebalance from time to time, placing more niche bets may also prove advantageous. Yes, even if that means taking on the high level of risk that comes with buying individual stocks, which financial advisors so often warn against. As Arnott sees it, some good will come of it either way. So go ahead and swing away. Read the original article on Business Insider
