Learning Entry Level Economic Terms

8 Basic Components in Investing

• Time Frame – How long? Short, mid and long term.
• Tax Consequences – what’s going in, coming out.
• Diversification/Asset Allocation - lower risk, potential enhanced returns.
• Liquidity - at least to some percentage of accessible cash equivalents
• A Long-term perspective to keep your anxiety, fears and worries in check.
• Not becoming sentimental and holding an investment too long
• The “Big 3” investing tenants: Buy Low, Sell High & Hold when in doubt
• Having a specific investment plan and knowing what each choice is       supposed to do.

Some Basic Facts

• Market declines happen. There have been a number of bear markets over the past 30 years; however, the overall long-term trend has been up.
• Sometimes corrections are good for the market. Corrections tend to be shorter and less severe than bear markets. That’s usually why investor’s refer to them as “buying opportunities”.
• Most often the market’s wrath descends on companies with very high stock prices relative to their earnings, or to business concepts that look great in the euphoria of a booming market, but in the end appear to have very little fundamental support.
• Market timing doesn’t work. In an ideal world, we would all “time the market” and “pick the winners” by pulling out money when it peaked and would be investing again at the bottom. This is extremely difficult to accomplish. Why? Because we only know the peaks and the valley’s in hindsight. We only know which investments were winners in hindsight.
• Staying invested and sticking to a planned asset allocation model has historically beaten timing hands down. Many of us find it difficult to invest when the market is down. This impedes our accumulation planning goals. Based on market turmoil and media hype, we choose (behavior) to stay on the sidelines waiting for the “right time” to invest. A systematic investment plan – “dollar cost averaging”* into the market – may be one of the best strategies for dealing with market volatility. Whereas waiting for the right time may be a poor strategy because only in hindsight we know when the right time really was.

When Stock Markets decline

• Evaluate specifically how each investment has performed as a result of the stock market decline. Compare performance of each security to its peers.
• Selectively sell some of your losers along with some of your winners if you need to raise your cash assets in the near term.
• Continue to rebalance* your portfolio if your asset allocation weightings have been altered significantly due to stock market volatility.
• Continue to monitor economic news for any fundamental change in the direction of the U.S. economy. You may want reallocate some of your investments to better accommodate a change in these fundamentals.

Don’t listen to the Wall Street pundits about the short term direction of the stock market. They are often wrong about their predictions. Remember they sell news. It’s your money at risk, not theirs.