A few random thoughts.
*First don’t panic. The absolutely worst thing you can do in a down market is to sell. That just turns theoretical losses into real losses. The general rule is buy low and sell high. The smartest people back in the dark days of 2008- early 2009 were the ones who stayed calm and bought in when everyone else was running for the exit with their hair on fire.
*Investing in the stock market should be approached as a long term project. I will define long term here as being ten years or longer. If you have a long term investment horizon and can handle short and intermediate term volatility then you will be fine (probably).
*The best way to invest in stocks is through low cost index funds or near equivalent ETFs. Just buy one or maybe two super cheap index funds (I suggest the S&P 500 and a good international index fund) and set the dividends to auto-reinvest. That way, whether it’s a good year or bad, you are always guaranteed to beat the market. And long term the market does tend to go up. Index funds also have the advantage of giving you instant diversification and they keep your fees and expenses to a minimum. They are also usually very tax efficient. The most important thing is to leave your index funds alone and tune out the noise of short term movements in the market.
*Do not try to outsmart the market. Very few people are able to do it over the long term. And avoid frequent trading. The only people who make money doing that are the brokers. Actively managed mutual funds and hedge funds that aim to beat the index are a racket. Avoid them. Numerous studies have shown that they invariably fall short because the investors get killed by high fees and expenses, which compound the loss in earnings over time. Read pretty much anything by Jack Bogle for more information.
*For those who do not have a long term investment horizon or are by either choice or necessity conservative investors you will want to limit your exposure to the stock market because of its very high near and intermediate term volatility. Depending on your situation, if you can’t afford steep losses you will want to have between 25- no more than 50% in the market. If you are retired and not independently wealthy I would suggest not more than a third of your money in stocks. The rest should be in high quality bonds or a good bond mutual fund. Tax exempt bonds may make sense for those in the top couple of income tax brackets.
*Keep a strategic reserve for unexpected emergencies. You should have at least six months of essential living expenses in some form of cash or a near equivalent.
*I am also a fan of gold as a disaster insurance policy. In an SHTF scenario banks and the financial markets might be closed for a while. In that kind of situation paper money may lose value quickly. Gold is the ultimate form of emergency money. Don’t go crazy with it. Gold pays no interest or dividend. Think of it as a the financial equivalent to a catastrophic health insurance policy. If all goes well you will never need it. But if you do...
*Finally for those with a very low risk tolerance, which is to say you really can’t afford significant losses or you stay awake at night worrying about stuff like what’s been going on over the last couple of weeks, consider the Harry Browne Permanent Portfolio. It is a completely crazy portfolio construct that when I first heard about it I dismissed it as nuts. But it does actually work. Basically it is a 4x25% portfolio with one quarter in each of the following assets,stocks, long term government bonds, cash and gold. See here for more information...
https://wiki.earlyretirementextreme.com/w/index.php?title=Permanent_Portfolio#External_links
Thanks so much for that post. I have copied it and saved it and will check out your link. I went through a phase of reading financial blogs voraciously for a few years (largely contrarian, including The Daily Reckoning) but, while interesting, it actually paralyzed me as far as anything beyond the safest investments.
There’s a lot of good advice on this thread. It’s something I’ve been thinking about lately. I am (irrationally?) afraid of longer-term (5+ years average maturity) Treasury bond funds because of the huge and growing deficit and unfunded liabilities.
Glad my post was helpful. A minor correction on the link. It should be...
https://wiki.earlyretirementextreme.com/w/index.php?title=Permanent_Portfolio
If you have any questions feel free to drop me a line.
Cincy - you won’t get better advice than what NRx just gave you. From anyone. Investing isn’t hard, and it’s not complicated. My only mild disagreement with NRx is his take on gold, but I understand his reasoning.
Excellent post. I told my kids you save for cars and houses but invest for your future. Investing is like owning land, you improve and cultivate it.