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July 6, 2008

Dave Ramsey: Single stocks vs. mutual funds; confusing financial advice

My father in-law swears by single stock picks and CDs. He says he'd made lots of money this way over the years. What do you think of this strategy?

I guess that depends on what you call "lots of money." Single stocks and Certificates of Deposit — I like to call them Certificates of Depression — are not the route I'd use for investing. There are much better ways to handle your money!

I don't own single stocks, and I won't suggest them as part of a good investment plan. The fact is that single stock investments don't consistently generate returns like good, growth stock mutual funds . If, for some reason you're just in love with the idea of owning stock, I'd suggest that you limit your single stocks to no more than 10 percent of your investment portfolio.

The problem with CDs is the possibility of having to pay fees for early withdrawal, and the fact that they have a very low rate of return. As an investor, you need to see high enough returns to outpace inflation — about three to four percent a year — and to pay taxes on the gains if it's not inside a retirement account. Most investors need to see about 6 percent per year over time to do these things.

I'd suggest using CDs only for savings, like for purchases or maybe taxes if you own a business. Not for long-term investing.

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We've completed the first three Baby Steps, and we're ready to start investing. Our friends recommended an advisor, and after a few meetings with him we're very confused. He seems to be pushing us toward certain things we don't understand. Is this unusual, and will things become clearer over time?

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