Investors are fearful, confused, outraged. They don't know when and if the debt ceiling will be raised. If it isn't, where should they invest? Should they invest at all? What are the ramifications of the default and how long will those negative influences last?
On top of that concern, pile a terrible housing market and an even worse jobs market. Every where they look, it's bleak. Naturally, when things are this bad, investors go into a protective mode. There are very few aggressive positions taken because those are the first ones to lose large percentages when more bad news comes. And it seems all the news is bad. So what should an investor do?
First, keep your eye on the prize. And the prize is retiring wealthy. That means developing a game plan that fits your comfort level. A great way to start is to buy a large cap mutual fund, one that gives income and growth. There are dozens of these and all scrutinizable at morningstar.com. When you find one you love, buy a little of it, then add to it every month with the same dollar amount. That way you'll buy more when the fund is down, and less when the fund is up. In the long run, your overall cost per share will be skewed to the lower side since that's where most of the fund was bought.
Second, don't panic. There have always been and there will always be tough times in the market. Anyone who lived through the 90's now realizes how special that time was, blessed by almost a perfect storm of positive events that drove the market higher seemingly every day. Times have changed. We're not going back to the 90's, not in the next few decades anyway.
That doesn't mean you can't invest in stocks. Far from it, good stocks still return great numbers. IBM in the last year gave investors a return of 43.06%. Apple was up 53.69%. Google managed 26.59%. GE made 17.47%. Even in these difficult times, these companies delivered for shareholders. Are they still good buys? For certain investors they are because their tolerance for risk is higher than for others. For totally risk averse investors, probably not. Still, they deserve consideration no matter what type of investor you are. Their managements have been able to turn larger profits when most other companies haven't.
Fourth, look at a chart for the Dow Jone Industrial Average (http://finance.yahoo.com/q/bc?s=^DJI&t=my&l=on&z=l&q=l&c=). This will take you back to 1930 if you click on Max at the top of the page. When you see that ever climbing graph (after 1933), it gives you some perspective. Yes, there were some bad hits to the market from time to time. But it always climbed back. It will again. To participate in that inevitable event, you need to own stocks.
Fifth, buy some stocks, just not as much of each one as you normally would. Now is a great time to double your research effort and make a list of stocks you'd love to own. Then determine what price you would pay. Make a watch list on any of the quote programs online. Some will even send you an email when your price is hit. (Just be sure to check the latest news before you automatically buy....there may be a terrible reason your stock just got to your buy zone.) Then start buying small amounts of stock in your favorites.
Yes, it's a tough time. Yes, the politicians are playing politics with the debt and should all be voted out if they don't get this resolved quickly. The housing market is a long way from being healthy. More jobs aren't being added quickly enough. But none of these things should keep you out of the stock market. Because they will get corrected. Better times will come back. We just don't know when. And if they start tomorrow, and you're not in the stock market, you'll wonder why you didn't take some risk because the rewards will be tremendous, especially for those who were able to stand the pain and stayed with their long range plans.
- Ted Allrich
July 26, 2011