Looking To Invest Right Now? 5 Basic Investing Tips For Any Market
A lot of people have been asking me recently, is this the stock market bottom? Is it time to jump into stocks? Well, it's human nature to be asking these questions, especially now that the market has dropped precipitously around 30% or so from its peak.
But when we invest based on market movement, we're actually applying our emotions into the mix. In effect, we're timing the market to some extent as we see great bargains in stocks right now, salivating over the cheaper stock prices.
But what if there was a way to invest with less worry and less emotion? Now I can't say that you can be entirely worry-free when you invest but you can certainly mitigate concerns over your portfolio when you apply a few techniques, which I've personally chosen to follow myself.
As an investor for over 20 years who's lived through 2 recessions (and going on a third), here are some tips to weather market cycles without losing sleep:
The Automated Way To Invest in any Market
1. Look at the long term.
The idea of "long term" varies depending on how old you are. The younger you are, the longer is your investment time horizon and the more time your investments can grow to make up for bad market cycles or to benefit from the awesome power of compounding. In this regard, investing early gives you a leg up. The flip-side, of course, is that the older you are, the more conservative you should become. A good technique is to diminish your exposure to equities over time by doing portfolio reallocations on a regular basis. Rule of thumb: subtract your age from 100 to yield a recommended percentage for your stock allocation. Though this is a simple way of arriving at a ballpark stock allocation, you'll still need to take into account your risk profile and financial goals to arrive at your final numbers.
2. Resist market timing.
I learned the hard way that short term market timing is a lousy approach. I've been whipsawed by the market via short sales and stock trades during volatile periods. These days, I resist the urge to market time even while the market dances like a drunk sailor. My take is that if you trade, you should know what you're doing, and not just get into this because you're acting on emotion.
3. Be well diversified.
Stock market diversification can be effectively realized via indexing and appropriate asset allocation strategies. You can also buy general, actively managed mutual funds and achieve some level of diversification, although this means you're entrusting the performance of your funds to its fund managers. I prefer to do it the passive way -- by tracking the indexes that represent major asset classes.
4. Choose good asset allocations for your portfolio.
Believe it or not, but the overall total returns of your investments will depend largely on how your asset allocation is structured. Most financial literature will suggest an allocation that includes stocks, bonds, cash, real estate and even precious metals or commodities in your portfolio since these asset classes don't behave in lock step (the less correlated asset classes are, the better!). To the chagrin of most investors, a proper asset allocation hasn't really sheltered them much in recent months -- why? Because only "cash" seems to have survived any form of drubbing this year. Here's hoping that the long term will yield better results for a well allocated portfolio. Here's a discussion about the best places for your money right now.
5. Go automatic. Invest piecemeal.
Dollar cost averaging is a great way to ignore the current volatility in the markets. Invest regularly and forget about it. It'll keep you from obsessing about your losses while allowing you to accumulate battered investments at lower prices.
6. Keep a casual eye on your portfolio.
Diversification, asset allocation and dollar cost averaging are techniques that allow us to be more complacent about our portfolios, but don't forget about your investments for too long! You'll need to evaluate your investments on a regular basis just to make sure you're on track towards your long term goals.
7. Rebalance your investments over time.
And once you do evaluate your portfolios, you can decide whether it's a good idea to rebalance your holdings to reflect your allocations accurately. When the market goes haywire, rebalancing to keep the asset classes in the correct proportions will allow you to automatically buy those assets that have suffered price drops, while selling out of assets that may be relatively pricier (or that represent a higher weighting or concentration of your total assets).
8. Know when to hold and when to fold.
You've got losers? Did you invest in speculative penny stocks, individual stocks or REITs in the last few years? Maybe it's time to unload them now and take the loss. By doing so, you'll achieve two things -- you can harvest your loss and make it benefit you during tax time, and you'll be able to move your position into hopefully better investments like index funds, where your funds can grow with a bit more predictability.