The DOW is down at 8,000 level from its peak at 14,000 level. The daily ups and downs are so extreme that the index can move over 100 points in just a few minutes. This can make any investor — new or experienced — nervous and doubtful.
Should I get out of the stock market?
Should I get back in?, or
Should I invest in something else entirely?
Recently, a reader asked “I would just like to know if right now is a good time to buy long term investments because the market is low right now?” Well, here’s an excellent article on pitfalls that you must watch out for when investing in mutual funds.
My answer is very simple, anytime is the right time to invest if you have the right long-term investment strategy in place. I don’t believe in finding the hottest investment and plow my money into it. Sure you could win big, but you could also win big by gambling or playing lottery too — but you know their returns on investment (or lack thereof).
What’s the investment strategy that makes anytime the right time to invest?
1. The traditional “Diversification”
The decision between picking a handful of the “best” investments and diversification is a personal one. For me, I believe in the latter. I am more comfortable with a diversified investment portfolio than having a handful of potential winners. By having a diversified portfolio with low asset correlation, the chances are different asset classes will rise and fall in value at different rate. This basically lowers the risk of your overall portfolio and smooth out the performance level.
2. Regular Contribution
Second is to invest regularly into the investment portfolio. This is easily accomplished with 401k contributions, or you can set up an automatic investment plan for your other accounts. Similar to dollar cost averaging, regular contribution allows you to buy more shares when the prices are high and less when the prices are low.
For example, let’s assume Joe buy 0 of VFINX per month:
Date
Price
Shares
January
7.02
0.7873
February
2.89
0.8137
March
1.75
0.8214
April
7.67
0.7833
May
9.31
0.7733
June
7.83
0.8487
July
6.85
0.8558
August
8.54
0.8436
September
7.37
0.9314
October
.34
1.1193
November
.70
1.2392
The key thing to notice here: Joe is buying more as the price goes down, and less as the price goes up.
3. Redistribution
As I mentioned earlier, the pieces within the investment portfolio tend to grow at different rates. This gives you another opportunity to buy low and sell high my rebalancing your portfolio. Specifically, once your asset allocation becomes drastically different from your original allocation, you could rebalance your portfolio.
In the example above, you are cashing out of bonds and other non-equity investments to buy more equity — i.e., large-cap, small-cap, and international.
This is easily accomplished with 401k, but a little trickier in other types of accounts.
I know that this lazy and steady approach to investing is not for everyone, but give it a try. You may find that it works better than you think.
Here are a few more articles from other bloggers:
Invest As Much As You Can Now, So You Will Have Options Later at Cash Money Life
How to Profit from a Stock Market Crash at The Dough Roller
An Expert Weighs In: Is Now The Time To Buy? at All Financial Matters
10 Signs Of A Stock Market Bottom at The Digerati Life
Posted under Credit Repair
This post was written by admin on November 17, 2008
