by Archie M. Richards, Jr., CFP^®
February 24, 2003

Dave writes, "I'm retiring soon with a lump sum from my company and am toying with the idea of investing in Ford stock. It's priced low and has a generous dividend. What do you think?"

Sinking your money into one stock, or even a few stocks, Dave, is foolish.

If you ask for the opinions of thousands of people who are informed about Ford, some would be optimistic and others would not. But no one can be certain about what Ford's price will do, including Wall Street hot shots.

Here's why: The stock's current price has already taken into account everyone's opinion. In fact, the price is the only thing that takes into account everyone's opinion.

Let's say that someone has a favorable intuition about Ford's future and buys the stock. The price rises from $8.65 to $8.70 a share. This intuition has now been taken into account by the price.

Five minutes later, someone else has an unfavorable intuition about the stock and sells it. The price falls to $8.67. That intuition is now discounted.

Those two investors, you realize, don't know each other. The only way their intuitions become evident is by the changes in the stock price. The price discounts everyone's knowledge and intuition. To be sure of profiting, you have to know more than everyone else put together.

Look at the matter another way. Let's say it's the day before next year's Superbowl. Tampa Bay again faces the Oakland Raiders. Most people think Tampa Bay will win, and you do too. You bet on Tampa Bay.

Tampa Bay does win. But does your bet pay off?

No. You also had to guess by how much it would win. The bookie's "line" required that the team had to win by at least 12 points. It wins by only 10. Sorry, you lose.

Until game time, the bookie adjusted the line according to how the bets came in. The more betters that expected Tampa Bay to win, the higher he raised the line. The line discounts everyone's knowledge and intuition. To be sure of winning, you have to guess the future more accurately than everyone else put together.

Ford stock has no bookie. But stock exchanges, market makers, brokers, the SEC, and the IRS all want to get paid regularly. Your knowledge and intuition about Ford has to be so much better than everyone else's that you can pay all those people and still make enough from the stock to support your retirement.

You don't think I know how the Ford stock will perform, do you?

I certainly don't. The effort to figure out what any individual stocks will do is generally a loser's game. When you put all your money on even a small group of stocks, you're taking a risk for which you are not compensated. This is especially true of big, well-researched stocks like Ford. While the market as a whole may be rising, the few stocks you own may go down. Concentrating your money brings no extra reward. It brings only extra risk.

To participate in the entire U.S. market with a single holding, buy the exchange-traded fund iShares Russell 3000 Index Fund. You'll own a tiny share of 3000 stocks representing 98 percent of the value of all U.S. publicly-held stocks. If you hold right through the up-and-down fluctuations, you can bet your boots and your socks and your diamond rings and everything else you own that this holding will support you nicely during the twenty or thirty years of your retirement.

I consider even the entire U.S. market too much risk. Also spread your money to index funds of foreign stocks, real estate investment trusts, and bonds. Diversification among these different types of investments will give you the best reasonable return with the least reasonable risk.

This approach may not appeal to you, because it gives you less to do. No longer would you need to spend time researching stocks like Ford. Your future financial health might be improved if you devote your time to another hobby.