The Market: In or Out?

Recent days have brought extreme volatility in the stock market. Almost daily people are asking the question, “Should I stay in or get out of the market?” The only sure thing right now is that if you had $100 invested two weeks ago you have about $85 now, if you decided to sell the shares. One basic maxim of the market is to buy low and sell high. In reality when either of those events happen it is for most people just guesswork. In order to have a chance to prosper in the market there are several proven principles that must be followed. When we allow the rules of the market to work and get professional advice we have the best chance for success.

RULE #1: Prior to investing have several months of income set aside in a low interest, accessible fund for emergencies. Murphy’s Law of investing is that when you have an emergency fund you seldom need it, but when you don’t things happen.

RULE#2: Be in the market for the long term. Short-term put-and-take investing yields losses and frustration. Long-term investment returns show gains larger than bonds or fixed interest products. The tendency, for many, when the market turns down is to panic and sell, thus assuring a loss.

RULE#3: Regularly invest an amount that is comfortable and realistic for your economic situation. Doing this takes advantage of a concept called “dollar cost averaging.” Which simply put is buying shares over an extended period of time at various rates thus pulling out the highs and the lows of the market.

RULE#4: Keep in mind that you haven’t gained or lost anything until you are at the point of selling. In 2008 my wife’s account lost about 35%, but we decided to keep investing on the hope of coming to a point of recovery. Fortunately, she recovered her losses and even had some gain. With our impending retirements we were no longer RULE#2 investors, so we moved her funds to a fixed interest account. We used Will Rogers famous quote, “I’m not so interested in the return on my money as I am the return of my money” to make our decision.

RULE#5: Balance risk and reward with your investment capacity. Most people really can’t afford high risk investment ventures because they really can’t afford the downside possibilities. The great percentage of investing comes in mutual funds there the risk and the return are both lower and diversification is achieved by the number of companies and industry sectors in the portfolio.