"The way to make money is to buy when blood is running in the streets." Said the famous John D. Rockefeller
I know the above quote is extremely cliché, and in today’s state of the market, it seems unfathomable to be optimistic to invest even more capital into equities, but the underlying fact here is that Rockefeller said this for a reason. He did not become synonymous with wealth for absolutely no reason. This is why I have compiled ten tips for future investors, current investors or even ex-investors to see the light at the end of the proverbial tunnel.
1. Cost-averaging would have yielded a 7% return during the Great Depression — With all the unjustified talk of another depression hitting the U.S. (Which I state in tip #2), I find this statistic very telling and invaluable pertaining to the importance of dollar cost-averaging. What is dollar cost-averaging? Very simple. Dollar cost-averaging is the monthly investment of a particular security (Bonds, stocks, mutual funds, etc) with a constant amount, regardless of price per share. This will evenly spread out your investments and prevent severe losses from investing all of your capital in a certain time period, just prior to an economic collapse. No matter what anyone postulates or claims, NO ONE can predict the future, let alone the future of the economy. What we can do is analyze the past, learn from it and take calculated risks. If you are asking yourself, well, how much should I allocate each month to invest? Well, the answer is as much as you can without compromising daily quality of life. $100 is better than nothing, and that $100/month goes a long way in 5-10 years if it returns the average of 10%/year. Finally, before you go off and invest, thinking cost-averaging is infallible, think again. This in no way guarantees you will make money. It simply greatly mitigates losses and exponentially increases gains. For the safest equities, check out index mutual funds (Note: Most mutual funds do have a $1,000 minimum subsequent investment). For more on mutual funds, check out tip #3.
2. The best and brightest financial analysts and economists are working with the Federal Reserve to rectify the problems — This may be one of the most overlooked tips. The Federal Reserve isn’t just bending over to this bear market (and possible recession). Some of the world’s best economists are working with politicians, Wall Street and the Federal Reserve to correct this country’s flaws and get back on track. For people not in the financial sector and cannot comprehend just how complex and abstract the economy is, I suggest reading “A Monetary History of the United States,” by Milton Friedman. He successfully revealed the true causes of the Great Depression, which by the way, took over a half-century. This book will indefinitely give you perspective.
3. Diversify with mutual funds — First off, what are mutual funds? Mutual funds are funds which are comprised of one or more investment vehicles, such as stocks, bonds, CDs, etc, and dozens and sometimes hundreds of different types of those investment vehicles. For instance, instead of buying stock of just one company, the fund manager buys many different stocks to mitigate losses and provide investors with the highest possible returns. On top of that, you have a fund manager and financial analysts doing all the research and decision making for you. This is advantageous for many reasons. One being, the fund manager is extremely qualified and spends endless hours and endless amounts of the firm’s capital researching the direction of the market, balance sheets and viability of company’s stocks and more, all for around a .75% expense ratio.
4. Expand your horizons past US securities — Most investors are unwilling, or just intimidated by international funds and investment vehicles, because they are either ignorant of them, think they will due the US a disservice by investing outside of our borders (which is not true at all) or because they contend that international securities are much more volatile and hence, risky (which is true to a certain extent). Staying on my last point, as the old adage goes, “The higher the risk, the greater the return,” is currently being demonstrated in today’s international market. From 2003-2007, most emerging market funds returned around 35-60% annually. However, the downside, which there always is, is that in the past four quarters, most of the same emerging market funds that returned an incredible 35-60%, are down anywhere from 30-55%. This isn’t a scare tactic, just something to help you get perspective that no security, bond, equity, etc, is impervious to decline. However, due to the substantial losses sustained to these funds, they are extremely discounted and is the perfect time to buy.
5. Stay headstrong and ignore the naysayers — It seems that every financial publication prides itself on claiming that “we are entering the second great depression” or that this will be a perpetual decline of the US economy with no end in site. Do yourself and your broker a favor and ignore them. The media is notorious for sweeping accomplishments and bull markets under the table, while embracing and headlining economic declines and extremely unlikely, albeit possible, future outcomes. I have only ever seen one financial columnist articulate his optimism about the market, Jim Jubak. I highly recommend reading his articles because he actually justifies his notions and is very reputable.
6. Millionaires have their wealth by saving, not increasing income — While this should be applied to everyday life, whether it is a bull or bear market, it is actually practiced by very few. Millionaires in America are increasing dramatically not because of higher incomes, but more efficient means of saving money. This ranges from shopping at Wal-Mart and other wholesalers, to buying a fuel-efficient hybrid instead of that gas-chugging SUV. So please, I know the new iPhone 3G’s are “pretty,” but think about the future. Besides, touch screens, just like every other piece of technology, will be obsolete in a year. For more saving tips, check back later for my next article on money saving tips!
7. Avoid day trading at all costs!— I cannot emphasize this tip more. Essentially, day trading is trading one or more securities, multiple, sometimes dozens, of times a day. This also applies to nervous investors that just bought a stock, and after either a few days, or even hours, drops a couple of points. The investor starts to lose cognitive thought and tries to pull their remaining funds out. Save yourself the commission fees and stay in it for the long haul! There was a reason, hopefully, that you purchased that certain stock. Stay optimistic!
8. For every bear (bad) market out there, there is a bull (good) market — Jim Cramer, no matter how much I want to disagree with him, said the aforementioned quote best. The universe of investing is much too large to just limiting yourself to longing (owning) stocks. I would strongly suggest that you enlighten yourself, if you haven’t already, to options, precious metals, shorting (predicting stock will depreciate instead of increasing) and ETFs. All of the above are great investment vehicles and if used correctly, can increase your returns exponentially.
9. The worst is almost over! — It has been approximately a year since the S&P 500 has reached its all-time high and the proverbial road has been a jagged 500 foot drop, but hang in there. Many economists are predicting a mild recession, and economic recovery in three to four quarters. With many companies going bankrupt, it seems any entity, regardless of size or historical performance, is safe. However, this is completely natural during a receding economy and there may be more with the federal government most likely regulating certain industries in the future. As I said before, see the light at the end of the tunnel and look at this as an investing opportunity!
10. Have fun with investing! — Ok, that may be a little corny, but it’s true! Way too many people let the market govern their lives by depending on the market to behave a certain way. This should never be the case. Investments need to supplement your income, not dictate it. And most of all, just like everything in life, have fun with it! Good luck and happy investing!
Thanks! If you have an investing question, email it to matt by filling out the contact form!
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