AILSA CHANG, HOST:
This pandemic has created an army of new investors. With people stuck at home, a record 10 million new brokerage accounts were opened last year. The market got a little wobbly earlier this week, but stocks are still near record highs. So we thought this was probably a good time for people to get their ducks in a row and figure out a good plan for the future, and to help us with that, we're going to bring in NPR's Chris Arnold, who covers personal finance for our Life Kit podcast and joins us now. Hey, Chris.
CHRIS ARNOLD, BYLINE: Hey, Ailsa.
CHANG: So a lot of new investors are out there trying to pick hot stocks. What could go wrong, right?
ARNOLD: Yeah, what could possibly go wrong with that, right?
ARNOLD: You know, so, I mean, investors are out there. They're watching YouTube videos, and they're in Reddit chat groups. And, you know, they're probably getting a mix of some good, some bad, some ugly advice. But overall, the market over the past year and even going back before that has been going up and up and up, so a lot of people have been able to make some money. I talked to one couple, Mollie and Chad Wood in St. Paul, Minn. Chad used to wait tables in restaurants, and when things shut down, he opened his first stock investing account.
CHAD WOOD: There's a marijuana stock that I found to be, like, significantly underpriced. And I said, oh, this looks like it might work. And I made, like, $1,500 on that one trade.
MOLLIE WOOD: Yeah, it was a decent amount.
C WOOD: It was a good one. So I felt like I was the smartest person in the world when I closed that out. And then I was like, oh, jeez, no, I'm not; I just got really lucky.
CHANG: Is Chad the smartest person in the world or not? I mean, there are a lot of people like him right now who jumped in, did well betting on a hot stock like GameStop or even buying and selling bitcoin. But tell us why maybe we shouldn't all go out right now and try to be like Chad.
ARNOLD: Well, I mean, look; it can be exciting to try to be like Chad, but as a long-term strategy, investing is the most powerful way that we can save for retirement and our kids' college and stuff like that. So the most brilliant investors around for a long time have said that for everyday investors like you and me, making short-term bets on what a stock is going to do next, it's just too hard to know, and it's not the right approach, and it's too risky. So we are much better off investing for the long term and investing in index funds. These are very low fees, so it doesn't cost much to go this route. And they let you buy the entire stock market, basically. So if any one stock crashes, that just doesn't affect you at all.
CHANG: But what if somebody does want to buy some individual stocks?
ARNOLD: Yeah, so people do. I talked to a former financial adviser who now works for the personal finance site NerdWallet. Her name's Tiffany Lam-Balfour. And she says, look; just do that with a very small amount of your portfolio.
TIFFANY LAM-BALFOUR: My dad liked to gamble, and my mom would, like, give him $200 and be like, there you go, you know? And that's it - (laughter) and take the rest of his credit cards and anything else away, right? So it's a very similar thought process. You have your core responsible portfolio. If you have some excess cash, OK, open a separate account. But don't let it intrude and interfere with that core portfolio.
CHANG: OK, that sounds sensible. But what should be in that core responsible portfolio?
ARNOLD: The key idea is that you want to own lots of different types of investments so you can make money in different ways and spread risk around. It's called diversification. I talked to Paula Volent at Rockefeller University. She's had some of the best returns of any endowment manager in the country, and she tells everyday investors this.
PAULA VOLENT: I always think of it as if you were in a beach town and you had a little stand, you would want to sell suntan lotion as well as umbrellas because you don't put all your eggs in one basket. So you want to have stocks. Maybe you have U.S. stocks. You have some European or emerging market stocks. And then you need to have things that are going to do well in down markets.
ARNOLD: That is when stocks are going down. So you own some Treasury bonds, a real estate fund. This might sound a little complicated. So there are age-based index-type funds where you just pick the year you want to retire; they figure out the rest for you. That's one way to make this a lot more simple.
CHANG: Sage advice from NPR's Chris Arnold. Thank you, Chris.
ARNOLD: Thanks, Ailsa. Transcript provided by NPR, Copyright NPR.