One reader, CD, left this comment on my previous post on the market:
Hey smart alec,
Stay away from stocks, funds, bonds, unlesss you know what you are doing. In the sense spending at least 20 hours/week on investing and constantly monitoring the markets.
Otherwise, this is not your ordinary market, and believe me it will suck your money out of your little purse, faster than you would think.
Sell every freaking fund and put them into money market account, preferably a t-bill only.
Having said that if you still would like to go long and invest, here is my advice for you:
– Never ever buy a single stock, especially nowadays. It is simply too risky.
– Always be a trend investor on indexes. Think about what will happen in the next two to six months. For instance, bank stocks may go up a little due to more “free” money thrown at them.
– Understand put/call options and how they work. How you can utilize them to set your selling and buying points.
– Understand the bond market. It is ten times larger than the stock market and usually a good indicator of the overall economy.
– Watch CNBC, Bloomberg, even Cramer. But never ever buy or sell based on their advice. They are always providing you what is already priced into the market and usually do not give you the full picture.
I disagreed with certain points of this comment, namely, that I would need to spend 20 hours a week monitoring the market before I put money in stocks or funds. However, CD’s words gave me a lot of food for thought… in that, do I really know what I’m doing?
I have an understanding of general macroeconomic conditions and the workings of stocks and bonds. I also have an academic knowledge of calls and puts, but I certainly don’t’ follow the market as closely as CD suggests, nor do I engage in call or put options.
So, given all of the above, am I ready to invest in this market?
I think so.
There are two types of investors that should do well:
- Investors who can sucessfully market-time over long periods of time (and there ARE those who can do this), or
- Investors who acknowledge that they do not have the skills to select high-performing stocks or funds consistently, over the long-term, and instead engage in a buy-and-hold / index strategy.
I think some of CD’s advice works for Investor Type #1. I, however, am Investor Type #2. I am a buy-and-holder. I DON’T have 20 hours a week to study the markets. And even if I did, I don’t think I can select the winners, year in, year out. This means that I am content with market returns.
So, I invest in index funds with very low expenses, and I intend to hold these funds for a VERY long time. My time horizon is 40+ years, so I think it IS okay (in fact, it might be beneficial) not to follow the market every single day (even though I do, though I never act on it). I don’t want to be an emotional investor.
This market has scared me, because I AM afraid that “this time it’s different,” that all the things we’ve learned from the past no longer holds true. This is my first real bear market, and it’s not fun watching my “little purse” shrink even further.
But to sell everything and put all my money into T-bills would be a reaction motivated by FEAR – and truth be told, I am just NOT that afraid right now. It might be naivete, or the lack of responsiblity for anyone but myself, but I’m feeling okay about the current market right now. (I probably won’t be if the Dow is still at 8,000 in ten years… but for now? I’m good).
And my purse might be little now, but I believe that with a diversified portfolio and consistent savings (and a couple pieces of cash-flow positive real estate holdings in the future), I will have a good chance of achieving my financial goals. I might be petite, but don’t be fooled – one day, I’m going to carry a big purse.
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