How to React to the Market: Investing in Unsure Times
About two years ago, the S&P 500 was climbing back up to 1,500 points, after plunging below 800 points in 2002. Then the mortgage bubble cracked* and the S&P 500 fell to under 700 points a year ago. Since then it has climbed up over 1,100 points, but has started falling again since the beginning of the year.
* No, that’s not the clichéd verb. Hmmm. Broke? Destructed? Cataclysmically exploded? Slithered? Hid? It will come to me.
So, for us laymen, what the hell should we do with our money besides buy beer, steak, video games and passable Valentine’s Day gifts? What is the best strategy for investing in an unstable market to be sure that we have steak money for years to come? Well, it’s time to jump into that unstable market. However, as a follower of Burton Malkiel and his book “A Random Walk Down Wall Street,” I believe in his tenets that trying to out guess the market will leave you out of the market when gains are to be had and in the market when losses are plentiful.
For example, when you hear news alerts about a vaccine being developed by your favorite pharmaceutical company, you are behind even the mailroom clerk at that company not to mention all the people that saw the alert before you. But, look, after the announcement the stock went up! I can make money that way! That’s because there are a lot of sheep like you. The real movers and shakers bought long ago and just reap the benefits of your purchases. So, this is why a buy and hold strategy of a well-diversified index fund, like one that mirrors the S&P 500, is the smart way to make money over long periods of time. You may be last to get the information, but if you hold stocks for a long time, you get to take advantage of others’ information.
On the subject of diversification, another big point is to make sure that all of your wealth is not tied up to your job. There have been a lot of bankruptcies as well as increased unemployment in the last year. If you lose your job due to a bankruptcy and your portfolio is all invested in your company’s stock, that’s a double whammy as your income and your savings safety net are both gone in a flash. The best way to diversify is again to take some of the wealth tied up in company stock and put it into an index fund.
Of course, this advice is like sex talk about wearing condom. You’ve heard it all before, it gets a little boring and it needs to be said. So now, it’s time to have a little fun.
Risk is fun. Of course, how much risk is fun depends on you. You may drop ten grand on a seat at the World Series of Poker, you may climb Mount Everest with one hand tied behind your back or you may drive a Volvo station wagon for the rest of your life. We all have different levels of comfort with risk. So, with your base established, if you don’t like risk, it’s time to soften the rest of the edges in your house. For the rest of us, it’s the time to invest in individual stocks to give you that feeling of winning big or losing big.
For me, the key is to invest in companies that you’re likely to follow on a daily basis anyway. Addicted to Ebay? Start looking at its stock price. See a lot of movies? Check out Viacom, Disney and the other movie studios to see what their stock price is. You dig cars? You keep up with the latest in men’s fashion? You like meat in a can? Start looking at those company’s stocks and check the prices.
Once you feel comfortable with what you know about a company and the price of the stock, jump in. You alone will know how comfortable you are with risk. The first step is not to try to time the market because you’ll probably miss, and if you hit you’ll all of the sudden convince yourself you’re the second coming of Warren Buffett.
To jump in, you’ll need to find a good discount online broker. I use Scottrade, but there are others out there that I’m sure would be fine. The key is to find a low price for trades, since trading prices eat into your return. If you use a broker, you’ll pay more for trades, but you’ll also feel less risk because you’re bouncing your ideas off a trained person instead of your sock puppet of Morgan Stanley. (Which, by the way, is not a real person.)
Now, sit back and try not to look at your stock price every minute of the day. Yes, maybe you’ll sell it quick (there will be tax implications if so) but tracking it closely will make it easier to make bad decisions. Like Netflix and me. I bought it at 17, sold under 40, and have watched it go above 60 since. Then again, I’ve held Southwest Airlines for quite a few years, watched it do nothing but go down and not even give me a dividend. There won’t be a golden rule for your individual stocks, but I would say keeping it for a while minimizes mistakes and makes the tax hit smaller. It also gives you a chance to earn dividends, which makes waiting more palatable.
Then, you can move to your next stock or move back to index funds. Just depends on whether you like the bet.
About Jason McClain Jason is an aspiring novelist, which means there is a lot of time to put off writing and watch baseball or go fly-fishing, hiking and traveling. By "a lot of time", Jason means "procrastination."