Can't buy a market

The U.S. stock markets’ performance has been lousy this year.  All the major indexes are off this year.  They’ve been negatively affected by news from Iraq and underperforming U.S. economic indicators such as the U.S. GDP growth rate and unemployment rate.  The price of oil is up to around $54/barrel.  The dollar has strengthened, but it is still very weak.  The trade deficit and federal budget deficits continue to grow.  Interest rates keep going up because the Fed is still mildly worried about inflation (of course, the price of crude doesn’t help–gas prices affect the entire economy).  Stalwarts like AIG and HP and formerly darling stocks such as Krispy Kreme have fallen in financial and regulatory trouble. There have been several large market losses this year and only a few modest gains.  What’s a small investor to do? 

I think now might be right time to begin investing again.  A down market cheapens stocks that should rise when the market rebounds.  It’s a simple fact that stock markets are cyclical.  During the doldrums of summer last year the markets tanked, and then 2004 ended with a bang following the presidential election.  2004’s market momentum unpredictably ground to a halt just days after 2005 started.  (The market usually has a good year after an incumbent president wins reelection.)  It’s important when investing not to focus too much on market peaks and valleys, because they tend to lead to irrational investing decisions.  At the end of last year, for example, I bought into (literally) the hype that will becomes a potent competitor to eBay.  Perhaps someday, it’s much too small now to become the next eBay.  Fortunately, I didn’t buy much, but I bought it at a very high price and the share price has since decreased by almost one-third since then.  The stock price might eventually recover, but I will likely sell it at a loss to recoup my loss.  On the other hand, I did not follow the crowd and buy DreamWorks Animation at IPO last year; I waited until its share price had decreased to a reasonable level and bought once the IPO euphoria subsided.  I sold it at a profit once other investors saw the value of the Shrek franchise and the fact that DreamWorks Animation is now a serious competitor to Pixar, a darling stock five years running. 

Although the depressed market is discouraging, I believe that now may be the time to assess what stocks, mutual funds, and bonds may be more attractive to buy (or sell).  Here’s a few suggestions if you’re interested in investing:

  1. Set a target price for both buying and selling investments. 
  2. Buy what you know.
  3. Choose investments you believe are undervalued and will outperform.
  4. Be patient; don’t panic when the investment rises out of reach or dips unexpectedly. 
  5. Do not day trade or buy and hold indefinitely.  
  6. Set a high and low target selling price and sell on schedule. 
  7. Don’t worry too much if the stock price of the stock you sold keeps going up; what goes up can and often will go down.
  8. Diversify equity holdings by buying mutual funds and bonds.
  9. It is preferable to sell individual investments prior to major announcements; don’t buy after an earnings announcement if the price swing is substantial (e.g. when Merck pulled Vioxx off the market last year). 

It is easy to get burned if you hold onto a stock indefinitely and continue to hold on to it while it tanks.  Too many people bought worthless investments and held onto them too long during the bust (2000-03).  For example, Infospace shares spiked in March 2000 at the equivalent of $1,300/share; today a share of Infospace costs $38/share.  Get in and out of a stock while you can.  Don’t waste your money buying at an exuberantly irrational market peak, and don’t watch your investment tank just because you think it will rebound.  Invest wisely.  Buy low at a target price and sell at a target price.

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