Reasons to Stay in the Market

Personal finance columnist Brett Arends of the Wall Street Journal discusses reasons to stay in the market…

Click here to watch the video.

When the Road to Investing Gets Bumpy

Investing in the stock market is a lot like driving on a long road trip.  At some point, you’re going to run into pot holes and rough patches.  When that happens, you should definitely drive with more caution, but you have to keep on going if you want to reach your destination.

Similarly, if you’re investing for long-term goals such as retirement, you will encounter some market volatility, probably several times along your journey.  While you may be tempted to pull over and wait out the rough times, it will delay or may even prevent you from reaching your goals.

So what should you do when the road to investing gets bumpy?

Buy Low, Sell High:  The whole premise behind investing is to buy low and sell high.  You can’t do that if you pull out of the market or stop investing when the market goes down.  If you’re investing for the long-term, you should be glad when the market is down, because then stocks are “on sale” and you can pick up more shares at a lower price.  Who doesn’t love a good sale?

Diversify: One of the best ways to defend your portfolio against market losses is to have a portfolio that is properly diversified.  If you review the history of the stock market, you’ll see that the best performing assets vary from year to year and that it’s not easy to predict which asset class will perform well in any given year.  Therefore, by having a mix of asset classes, based on your risk tolerance, your goals and your timeframe, you are more likely to meet your goals.  In addition, having a mix of asset classes reduces your risk of loss, since you won’t have all of your eggs in one basket.

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When Will Things Get Back To Normal?

That’s what clients are asking (or at least thinking) about the current stock market.

Well, I hate to break the news, but this IS normal!  The stock market goes up AND down.  It’s a cycle, made up of periods of expansion and periods of retraction, of good times and not-so-good times.

The market goes up, and periodically it needs to retract.  Right now we are in a retraction.  However, those who adopt a reasonable investment policy, diversify and rebalance their portfolio as needed – these folks have positive long-term investment experiences.

Does the market have you feeling squeamish?

As you read the headlines and hear the news, it’s almost impossible to avoid feeling a bit squeamish in today’s volatile market.  You’re probably wondering what’s in store for 2008 after such a bumpy first few weeks. Unfortunately, it’s impossible for even the most brilliant economists to accurately predict the future.

The most important thing you can do during volatile market times is to have a plan, and to NOT make rash decisions based on emotion.  During volatile markets, planning is essential to minimize your stress level.  That doesn’t mean that you won’t feel nervous if your investments decline, but focus and confidence will help you fight the natural human tendency when it comes to your own nest egg to sell when the market is down. Remember the old adage "Buy low, sell high"?  Now is the perfect time to "buy low".

Continue Reading Does the market have you feeling squeamish?

Investing for Your Child

If you’ve been reading this blog for long, you know that Kiplinger.com is one of my favorite websites for personal finance articles.  Kimberly Lankford does an Ask Kim column that I really enjoy.

This week’s question is about…

Investing for a Child
by Kimberly Lankford at Kiplinger.com

My son is 14 months old, and I would like to place a one-time lump sum amount ($2,000 to $4,000) in either mutual funds or a Roth IRA. I understand that the account will become his once he hits 18, but I would hope that the money could continue growing until he turns 65. What issues do I need to be aware of and which investment vehicle is preferred?

Dow Breaking New Records, Part 2

A couple of weeks ago I blogged about the Dow breaking new records when the Dow broke 14,000 for the first time.  Last week, the Dow broke records of a different kind as the market dropped 585 points.

So, should you be doing anything different, given last week’s brutul drop?  Nope…

As I tell clients all the time, what the market does on a day to day basis means very little, when you are investing for long term goals.

Here’s a great article I found on CNN’s Money site, that explains why "a triple digit change in the Dow means… almost nothing".

Why You Need Bond Funds

With the stock market doing so well, you might be wondering…

1.  Why aren’t my bond funds performing well?  or
2.  Why do I need bond funds in my portfolio?

The main purpose of bond funds (or bonds) is to provide diversification for your portfolio.  Diversification reduces the risk that your portfolio will lose money in a market downturn.

Bond funds typically go down when the stock market is performing well, and up when the stock market takes a turn down.  So when your stocks and stock funds are performing well, it’s normal for your bond funds to have a small or even a negative return. 

Dow Continues to Break New Records

The Dow Jones has broken records four days in a row now.  Today it closed just below 14,000, setting yet another record.

What does this mean to you and your portfolio?

It means it’s time to rebalance your portfolio!  It’s more important than ever to rebalance your portfolio when the market sets new records every day. 

Rebalancing is putting your portfolio back to it’s original asset mix, by selling your winners and buying the losers.  If you don’t rebalance your portfolio when the stock market is doing well, you take more risk in your portfolio because your stock allocation grows to a larger percentage of your portfolio. 

Coping with market fluctuations

You’re probably aware that the stock market fell 400 points last week.  How did you handle the drop?  Did you panic and sell, or did you hold tight?

Market cycles are normal and should be expected.  You shouldn’t allow your emotions to influence your investing decisions.  Remember these important points when making investment decisions:

Diversify to reduce risk.  Spread your investments among various asset classes (stocks, bonds, cash) based on your goals, time frame and risk tolerance.  If your portfolio is properly diversified, a decline in one asset type will be balanced out by a gain in another asset type.

Morningstar offers over 172 courses on investing

If you’re looking to learn more about investing, Morningstar has over 172 courses on investing.  Topics cover stocks, bonds, mutual funds and portfolio management. 

The classes are free and start from a basic learning level and progress up to an advanced level, so investors of all levels can improve their investing knowledge.  Visit the Morningstar classroom to review the course catalog and to sign up. 

In addition to these free courses, Morningstar also offers investing workshops for a nominal fee.  The workshops are more in depth than the free courses, and include exercises to help sharpen your investing skills.