Time To Jump Back in the Market?
How to know when the time is right for long-term investing.
Laura Adams, MBA
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Time To Jump Back in the Market?
This episode is about whether the time is right to get back in the market for long-term investing.
Many Jumped Out
We all agree that 2008 was a rotten year to be invested in stocks for the long term. Many investors threw up their hands, sold out, and put their money in safer havens until the storm passed. Well, has the storm passed? Should we get ready for sunnier days when we can profit from the market’s turn-around?
I’m not going to go out on a limb and say that the market’s hit bottom yet—it’s too early for that. But right now, the Dow Jones Industrial Average is up over 1,400 points from the significant low we saw in early March. I do believe there are optimistic signs that a turn-around point may be near. So if you’ve had all your money on the sidelines, this could be the perfect time to get back into stocks of strong companies that have good prospects for the future.
When to Jump Back In
Keep in mind that no one really knows where the market will go from here. The “catch 22” is that investing for the long-term too early means potential losses if the markets decline further. But investing too late may mean serious missed profit opportunities. Before you do anything, you should know that recovering what you may have lost very quickly is unlikely. The market would have to nearly double just to get back to where we were in October of 2007. But there will be a recovery. And if you miss the upswing, it could take many additional years to rebuild your wealth.
The reality is that the only way to profit from the market is to have money in the market at the right time. A wise man once said that if the timing’s right and the gods are with you, something special happens. Ok, that was actually a Rick Springfield quote, but I think he was on to something!
The best way to get a sense for when the time is right is to keep your eye on the ball. Unless you pay a portfolio manager to invest for you, you should make it a habit to watch the major market indices like the Dow, NASDAQ, and the S&P 500 on a regular basis. Sites like etrade.com and scottrade.com make it easy to see what’s going on at a glance. If you need help understanding these charts, The Winning Investor has an episode devoted to that.
What to Buy
There’s no denying that the market is cheap right now. Many great stocks might as well be sporting a neon, blinking 50%-off sale sign. Take Google for example: its high in late 2007 was over $700 per share—it’s now selling for just over $350. The same is true for Apple. Its current price of about $100 was over $200 less than sixteen months ago. Investing in companies with products and services that should maintain their strong demand is a very good idea. Their success will provide you with a share of the gains when the market gets bullish again.
Consider Index Funds
There will always be excellent returns for investors who want to spend time sniffing out relatively unknown companies that have the potential to crush the competition or that have exciting innovations on the horizon. But if you don’t have the time or inclination to do investment research, a market-matching index fund may be your best bet.
An index fund is a type of investment such as a mutual fund or exchange traded fund (ETF) that’s designed to match the returns of an index such as the S&P 500 or the Russell 2000. (Check out ishares.com as well as Money Girl episode 104 for more on investing in exchange traded funds). The objective of an index fund is to replicate the general performance of the market in which it invests. That provides broad-market exposure at a low cost mainly because fund managers aren’t required to actively pick winning stocks.
Keep Some Skin in the Game
Buying a set amount of index fund shares on a regular schedule allows you to invest without spending a lot of time or effort on your portfolio. Check out vanguard.com for some of the best-known index funds you can buy. Perhaps you commit to buying $200 worth of shares each month. If the share price happens to be down, your $200 will buy you more shares than when their price is higher. That method of investing is called “dollar cost averaging”. It won’t always mean your purchases of shares are at the best price, but it will guarantee that you’ll have skin in the game when the market rallies.
What to Sell
If you still don’t get a warm fuzzy feeling about buying back into the stock market, consider what you might want to sell. Periodic market rallies, like we experienced in the latter part of March, are the perfect time to unload losing investments so you’re not selling at rock bottom. If you have some stocks of companies that you don’t believe will rebound for the long-term, why not put your money to better use? Re-positioning your portfolio when there’s a more profitable place for your money can be a smart idea, even if it means taking a loss. It just makes sense to upgrade your investments to reduce the risk of further losses. Believe me, in five or ten years, you’ll be glad you took advantage of the opportunity to shed the real losers.
Should You Invest?
Before you make any investment, whether it’s in Johnson and Johnson stock or in your neighbor’s fledgling tree-trimming business, be sure you’re qualified to invest. What I mean by qualified is the answer to this question: Do you have enough emergency money in savings to live on for a minimum of six months? If you answer no, keep saving because having reserve cash is actually an investment in yourself. If you answer yes to having some healthy cash reserves, you’re in a position to put some money at risk in investments.
Administrative
Thanks to everyone who’s supported the show by downloading my newly released audiobook, Money Girl’s Guide to Retirement Planning. Find it on sale at Audible.com and in the iTunes store.
Chi-Ching, that’s all for now, courtesy of Money Girl, your guide to a richer life.
Man on Computer image courtesy of Shutterstock
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.