The Dow and S&P 500 are at their highest levels since September 2008. The Dow has risen an incredible 70% from the 2009 March lows of around 6800. If you believe as I do in the “buy low and sell high” strategy, then you completely missed the boat if you have not been in the market these past two years.
If you are a nervous investor or have been sitting on the sidelines, is it too late to jump back in and make some money? Although no one can predict the market with 100% certainty, (the market goes up and the market goes down daily, weekly, monthly, even yearly) history has shown the market always goes up in the long run. With the Bush-era tax cuts extended for another two years, I am very bullish and expect solid gains in 2011.
If you want to get back in the market, now is the time but do so intelligently. If you are a novice investor, read all you can about investing. Stay away from books or news programs that have “fast money” or “get rich quick” as the main topic. To follow their advice is the quickest way to part with your money.
Before investing, you need to understand at least six things:
1) Identify your financial goals: Is this for retirement, kid’s college fund, or a down payment on a house.
2) Your risk tolerance: There are two definitions of risk:
- Risk of loss = the possibility that the value of your investment could decrease.
- Risk of slow growth = the possibility that your investment does not appreciate enough.
You can Google “risk tolerance surveys” to assess your risk tolerance and to learn more. http://www.isi-su.com/new/risktol2.htm
3) Your time horizon: Time horizon is the length of time until you need to sell your investment. Investing for a long-term goal is very different from a short-term investment goal. Horizons can be short, medium, or long term.
4) Asset allocation: Asset allocation is the process of choosing among the various kinds of investment categories. Although there is no special formula, a good general rule of thumb is 100 – age = % to put in stocks or stock mutual funds.
Examples of asset classes include:
- cash (money market funds)
- real estate
- foreign currency
- natural resources
- precious metals
5) Asset selection: After deciding the proportion of your portfolio that you would like to invest in, you need to decide on what exact stock, bonds, etc you will hold in your portfolio.
6) Diversification: Diversification means reducing your risk by investing in a variety of assets in which returns are not directly tied over time. That is, don’t place all your eggs in one basket.
By understanding these six things and managing your asset allocation/diversification strategy appropriately for your time horizon and risk tolerance, you will go a long way towards minimizing your risk of loss in another stock market crash. If you are still unsure or don’t want to do the work, I suggest a no load or low expense index fund such as Vanguard 500 Index Investor (VFINX). VFINX tracks the S&P 500 Index and has a very low expense ratio of 0.18. A good idea would be to invest in index funds that cover different financial markets.