by Archie M. Richards, Jr., CFP^®
May 21, 2001

Sixty years old and much respected, Bob has had long experience as a building contractor. His wife Tricia, 54 years old, helps in the office, but she's not so hot with the plumb line. The children are grown. None of them chose to contend with constructing and renovating small buildings. Bob loves the work. He hopes to continue indefinitely, dying, when necessary, with his sneakers on.

Bob and Tricia have money in the business, of course - lots of it. But tremendous value resides in Bob's knowledge and hard work. If his sneakers should suddenly turn up empty, oh sure, there's a nice, serviceable building and some trucks and tools. But without Bob himself to use them, plenty of value would disappear.

Outside of the business, between their IRAs and personal bank account, Bob and Tricia have accumulated $70,000, all in bank certificates of deposit. Without Bob, Tricia won't starve, of course, but her wealth won't reflect the thousands of hours she and Bob put into the business.

Thirty-three years ago, they made a mistake. They bought a stock. Six years later, the stock ended up worthless. But choosing the wrong stock wasn't their mistake. All stock investors pick lousy ones.

Bob and Tricia bought the stock in 1968, when they had some extra money. This wasn't a mistake either. The right time to buy stocks is always when you get the money. But Lyndon Johnson wanted guns to knock around a few Asians, and he wanted Americans to have butter, too. The Federal Reserve accommodated by producing tons of money. Everyone had lots of it, and by 1968, plenty of people wanted to buy stocks. This wasn't the right time, it turned out, but the timing wasn't Bob and Tricia's mistake. Short-term swings in stock prices are unpredictable.

Bob and Tricia held onto the stock. This certainly wasn't a mistake. The worst thing people do in the stock market is to trade too much. But unfortunately, Bob and Tricia got slammed by the Pretty Big Depression of 1974, caused mostly by lousy government policy. Holding on wasn't a mistake; it was just more bad luck.

Here, now, was Bob and Tricia's mistake: They bought only one stock. Because this particular one happened to end up worthless, they surmised, whoa, the stock market was no place for them. They'd put their money in the bank, thank you. Never again would they set foot in that stock market wasp nest.

Some wasp nest! Since 1968, including reinvested dividends, stocks have gained in value by more than thirty times. Instead of $70,000, Bob and Tricia would have a great deal more wealth, and they wouldn't have had to work a bit harder for it.

Oh sure, they could have bought life insurance. Life insurance is an essential stopgap when the breadwinner is young, but it's a lousy way to build wealth. By the age of 60, life insurance policies should no longer be necessary.

Yes, a single stock was a mistake. When you buy stocks, if you have the money, choose twenty of them, at least. Here's a good way to go about it. Put the stock page up on the wall. Ask a twelve-year-old to throw a dart at the page. Whatever stocks the dart lands on are the ones to buy. The kid will be tickled pink, and your only cost for the investment advice will be one dart. In the long run, the chances are probably 10-to-1 that those beauties will outperform any single stock you select and 100-to-1 that they'll outperform any single stock your broker selects.

Back in 1968, Bob was just getting his financial feet on the ground, and Tricia was looking after babies. They had accumulated some money, yes, but never mind twenty stocks; one was all they could handle.

One was too few. They should instead have bought a conservative mutual fund, enabling their small investment to be spread among many stocks. If index funds existed back in 1968, one of those would have been the best choice. They should have added to the fund, when they could, preferably every month. They should have held on through the bad times.

And continue holding now.