Investing in Banks

November 20th, 2008, by

Q: It’s evident that there is a push to bail out the nation’s top banks. At today’s prices, would you recommend investing in banks? To me it’s a no-brainer.

–John Trottie, Air Force, Iraq

A: John, let me first say thank you for your service to our country.

I have to say that first because if I were near you right now I would smack you silly.

Well, I probably wouldn’t actually hit you, since in all likelihood you carry a gun. But metaphorically I would want to smack you because investing in individual stocks right now is not a “no-brainer” as you say. Have you seen the crazy roller-coaster ride the stock market has been doing lately?

Once venerable stocks such as Lehman Brothers have sunk like a ship hit by a torpedo. Good companies with solid financials are taking a beating. It’s like the wild-wild west on the market right now and most of us need to just take cover.

Investing in certain individual stocks with the idea that you can cash in if those stocks rise is akin to gambling. This is especially true if you’re trying to guess which bank stocks will someday soar again. We still have no idea how deep the problems go in the credit markets. Who could have guessed, for example, that Wachovia bank would have to be taken over?

Some of the greatest investment gurus like Warren Buffett suggest that the average investor should get into the stock market through low-cost mutual funds. In fact when asked, Buffett advises the inexperienced, individual investor to invest in a low-cost index stock fund.

So, right now unless you have money you want to gamble and can afford to lose, stick to investing via mutual funds.

Last modified: April 18, 2011 at 2:55 pm