So the financial crisis, Europe's inability to act in a big way to address its fiscal issues, and endless partisan bickering in Washington between Democrats and Republicans have prompted you to swear off stocks? Well, one school of thought argues, Panicking never made anyone a dime.
Further, reacting rarely results in an improvement in investment returns, hence with the above as a preface. So here are five time-tested axioms that every investor would be wise to keep in mind.
1 You Need A Two-Year Investment Horizon To Invest In Stocks. This is common sense, but it's astounding how many investors don't abide by this axiom.
In the stock market, 12 months is a short time, and a promising company could fall out of favor with institutional investors for any number of reasons. If that occurs, and your investment horizon is short, you could incur a huge capital loss with a company/stock that over a longer time frame would probably register an impressive capital gain.
Moreover, don't count on being able to jump into a stock, then sell it in six or nine months for a capital gain. Even the best stock analysts have trouble projecting stock price gains over such a short period. Chances are, if you try, you could get burned.
2 Remember Blue-Chip Stocks. Amid the steady advance of technology, the tech sector and its companion sectors are the rage -- they're the sexy stocks that grab most of the business press headlines, as they hold the promise of registering some of the biggest yearly capital gains.
But don't forget about the blue chips -- companies like IBM (IBM), General Electric (GE), Boeing (BA), Procter & Gamble (PG), Coca-Cola (KO) and Caterpillar (CAT), etc. These companies have demonstrated business models in established markets, and they've also seen recession come and go. Odds are that many will perform equal to or better than many tech companies over three to five years. So when the business press is clamoring about the latest, hottest young tech company, keep in mind the blue chips.
3 As Retirement Approaches, Increase Bond Holdings. Every investor should know this, but again, it's stunning how many investors don't practice it.
The time-tested investment asset allocation by age rule-of-thumb is: start with 100 and subtract your age, and the result is the maximum percent of your portfolio that should be in stocks. Example: For a 50-year-old investor, 100 - 50 = 50 percent in stocks; a 60-year-old, 100 - 60 = 40 percent.
Keep in mind that the percent is a maximum. Further, given today's continually changing economic outlook triggered by uncertainties related to the financial crisis, it's probably best to subtract another 10 percentage points from your total. Hence, for a 50-year-old, 40 percent in stocks; a 60-year-old, 30 percent.
4 Patience Pays. No, every stock does not pan out long-term. But in general, patience pays. Moreover, perhaps due to a society that is more instant gratification-oriented, or due to other factors, patience seems to be in short supply. However, the investment reality is that even the strongest companies can have an abysmal year, resulting in a 30 percent, 40 percent or even larger drop in their stock prices. The person without patience incorrectly sells, needlessly incurring a loss. A person with patience rides out the bad year and reaps the capital gain.
5 Don't Run For Cover Every Time The Market Hiccups. This is a variant of the stock patience rule, applied to the overall stock market.
Each day, investors are bombarded by financial information that amounts to just static. What appears to be a major development often turns out to be a minor one. Similarly, an economic statistic that appears to jeopardize a company's prospects can end up hurting very little.
In a nutshell, most hiccups turn out be full of sound and fury, signifying nothing, to quote Shakespeare. Most investors would probably be better off evaluating the market's health on a monthly basis. That may seem like a long time, but odds are that if you tune out the daily static, you'll make sounder investment decisions.
Having a long-term investment horizon, remembering the blue chips, increasing your bond ownership as you get older, remaining patient and tuning out the daily market static won't guarantee that you'll achieve your investment goals, but you'll be off to a pretty good start.