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What is the Best Stock to Invest In?

March 8, 2013

What is the Best Stock to Invest In?

Q: Jerry, I am a new investor and am trying to figure out what is the best stock to invest in? I have about $20,000 in my company 401k and just over $10,000 in a brokerage account that I used for trading stocks. With so many stocks to choose from, I thought I would ask if you could only invest in one stock, which stock would it be? What’s the best stock to invest in? Thanks Jerry for all that you do to educate your readers. I have been following your work for several years and appreciate you so much!

– Leslie M. (Kansas City, MO)

A: Leslie, thanks for the question. I am glad to hear that you are wanting to take a proactive approach to your finances. Unfortunately, determining the best stock to invest in can be a laborious process for a new investor. Basically, there is no single answer to your question. Just a few days ago, one of my family members wanted to discuss stock investing with me, which I’m always happy to do since it’s a passion of mine. This family member said, “Jerry, did you know that if you would have invested only $10,000 in Southwest Airlines’ stock in 1980, you would have had over 1 million dollars by the end of the year 2000?” The family member proceeded to ask me if there were any opportunities like that now, to which I gave the same advice I am about to give Leslie in response to her question.

Instead of looking for one single stock to invest in, a better approach is to develop a portfolio of stocks that meet your risk profile and your time horizon.

If you take the example my family member cited, the odds are extremely low that an individual investor with $10k to their name became a millionaire from investing in Southwest Airlines. The stock was at its absolute lowest in 1980, and it was at its all-time highest price at the end of 2000. An investor would have had to get extremely lucky to time that stock. Furthermore, the investor would have had to stay in the stock through all the ups and downs for 20 years. I’m not saying that it could never happen for someone, but I wouldn’t bet my retirement on it.

If you want a better approach, start with your own risk tolerance and financial goals in mind. If you have a higher risk tolerance, you may want to invest in higher volatility stocks, but higher volatility stocks could rise and fall quickly and cause you to lose sleep at night. Typically, the higher a stock’s volatility, the higher the risk associated with that stock. If instead, you are wanting fewer price gyrations, the best stocks to invest in would be those with lower volatility.

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