My husband is interested in the idea of investing in individual stocks as a way to gain wealth that we could use before retirement. Probably about $10K or so to get started.

We are 33 and 36 and make a little over $100K. We've paid off all our debt except our first mortgage. We have $10K in an emergency fund. Between maxing out our ROTHs and contributing to our 401ks (nowhere close to the max), we contribute about 12-15% each to retirement, plus another 3-4% employer match and also occasional profit sharing. We're in the 25% tax bracket.

I am not sure if we can do well enough investing outside retirement (either through mutual funds or individual stocks) to justify the tax benefits we are giving up by investing outside of tax-free/deferred retirement accounts. Even if we were Buffett geniuses or something. We are willing to do our homework about investing and realize that there is plenty of risk involved if we were to do something like that.

Not sure if it's relevant, but we are both considering taking lower-paying jobs in the future, and looking at the possibility of grad school for my husband. Right now we are stretched just with our retirement savings, aggressive 529 savings for our son (8th grade) and other things that are on our budgeting list (new washer/dryer, aging cars, etc.). IF/WHEN extra money comes along, my preference would be to up our retirement/college savings, take care of deferred maintenance-type things around the house, and/or increase our emergency fund to help us adjust to lower-paying jobs. I think my husband's main goal for the investing would be to give us portfolio/passive income that we could use to supplement our lower incomes while still being able to do the things we're used to doing, like traveling, etc.

Thoughts?

With $10k, you're probably going to get the snot beat out of you. OF course, it may look like you are making money, but you'll probably be less than the mrkt avg, especially once you consider your trading costs. You can make money at it, but it eats up a lot of time. Otherwise, blackjack in vegas is just under 50% odds, so you would probably be just as well off there.

If you had $10k, you would be better served to top off your 401k accounts. Understand, we all have different goals and what not, so this is just general advice, but it may not be "good" advice for you.

I know you didn't ask this, but I would think long and hard about continuing contributions to the 529 account. There are many other paths to financing a college education that are not available for your retirement.

Finally, I will leave you with the '96 Chairman's letter to the Berkshire Hathaway where Buffet himself said the following:



http://www.berkshirehathaway.com/1996ar/1996.html

Another approach is to set aside some "play money," in an amount that wouldn't make you weep if you lost it all, and use that to buy individual stocks. Go into it expecting to lose everything, which is a distinct possibility, and then any gains you make above zero will make you happy.

If you had used $10,000 to buy shares in AAPL back when it was $7/share, your $10K would be worth about $600K today (and would have been worth a lot more before the stock took a tumble in recent months). In contrast if you had used $10,000 to buy shares in Nortel your $10K would be worth $0 today. Picking the winner is easy in hindsight.

Comparing index funds vs. managed mutual funds is a no-brainer -- index funds are the way to go because something like 80% of managed mutual funds don't beat the index and if you think you can find the 20% that manage to do better you'll need a very reliable crystal ball. And even then most of those 20% won't beat the market consistently. Comparing index funds to picking individual stocks is a different ballgame, because there are, in fact, lots of people who invest in individual stocks who beat the market handily and scoff at the paltry returns of index investors. Some of them beat the market year after year, even decade after decade. But most of those people spend a lot of time at it, because it requires time and research to understand the companies and markets you're buying in. It requires some dumb luck as well, but it's not just a game of chance.

A rich old guy shared this joke with me a few years ago, seems applicable to this discussion.

Want to make $5,000 in the stock market?

Start with $10,000.......and it'll eventually be $5,000.

I've give this some thought but I just can't seem to figure out how investing in taxable accounts could be more advantageous than putting money in the tax-advantaged accounts unless your pre-retirement needs exceed your contributions to your Roth. You can shelter more money from taxes by putting more money in your 401k and if you have pre-retirement needs that exceed your savings, pull your contributions out of your Roth.

I can't help with any stock picking advice, but what it sounds like, is that while you are doing well now, you may want to take lower paying jobs in the future. That you have 10K to allocate to hopefully produce income that can be recouped before retirement.

First off, think about what will be affected when you take lower paying jobs, and what "bothers" you the most, whether it be lowering of contributions to retirement, to college fund, or getting things done around the house rather than post poning maintenance or badly wanted renovation. Maybe use the 10K to top off those areas.
If you feel those are going to still be fine, the next easiest thing would be to put that money in a Roth IRA or similar IRA where the principal can be withdrawn after 5 years (sounds like you may not be eligible due to income). Morningstar does analysis of different fund options with ratings depending on risk, company size, etc.

Another option is to somehow invest that money into some other kind of business. Mr. Money Mustache talks about peer to peer lending, and is doing an experiment with that. I'm a bit leery, but if you will willing to gamble it may be a way to earn some money. Other ways is if you know someone opening a small business and you do your homework, etc, lending the money to the business or investing a share in the small business. This is probably the most risky, but also may be the most lucrative.

My great grandfather was someone who invested in blue chip stocks before it was popular for an individual investor, and ended up doing very well (didn't hurt that he lived to 95 so he had a long horizon!). Historically probably not going to have the same results. But I think individual stocks are fine as long as you are going into it more as a hobby and not be deeply disappointed if you don't out earn the S & P or even lose money.