What? Stocks?

Continuing where we left off, if you are going to use the four asset classes I've been discussing, then what stocks, shat bonds and what real estate do you use?
First, if you own a house, and plan to continue to do so, then include the equity in the house as part of your portfolio in the asset class real estate. Then add up you investable funds beyond that.
Let's say it comes to $100,000 plus $100,000 of home equity. Then you may not want to include additional real estate in your investment portfolio of $100,000. You can't sell off part of your house, it falls in the illiquid asset category.
If you don't own a house, or choose NOT to include the equity as part of your investment portfolio, then you are going to divide up you $100,000 into some combo of thee big 4.
For argument's sake, let's keep it at 25% per assert class. That is 1/4th of the $100,000 goes into stocks, 1/4 to bonds, 1/4 to real estate, 1/4 to cash.
Now, what stocks?
Unless you have illegal inside information, there is no reliable way to value one individual stock over another. I know brokers talk about over-valued and undervalued, as if there were real prices that would express perfect equilibrium, but there aren't. If that was true, all stocks would sell at some multiple of their earnings, the same multiple. Say 10x last twelve months earnings. But the stock market doesn't work that way. Price/earnings multiples are all over the lot. The market collectively (all the bets of all the investors) decides to speculate on future prospects, not past success or failure. Any company's successful widget today can, via competition or product flaws, become tomorrow's whatsit, in the product trash-bin.
Your solution is to buy a basket of stocks, not an individual stock.
There is one trade off to buying one or two stocks only. You are more likely to hit the ball out of the park, and equally likely to go down in flames. So, like Dirty Harry asked, "Do you feel lucky?"
Buy an index. Do not pay a mutual fund manager to 'pick' stocks, he can't do it any better than you and a dartboard. (This includes private money managers, hedge funds or God. Even God can't pick stocks.)
Tomorrow. we'll talk about what indexes, although most of the discussion can also be revisited in earlier posts.)