Market Timing

I realize that everyone may not be in a mood to talk about stocks these days (they are down from the beginning of the year), and if you are like me, you try not to look at your investments but then decide to take a peek and realize that its not looking good.

But, what I have been thinking about is the importance keeping a rational perspective in this environment (where the market may not act rationally all the time).  I’ll suggest what that means to me right now, as I walk through what I personally have been thinking as I talk to others who either want to invest or want to know when to invest.

If you are trying to time the market highs and lows- historically speaking (the last two years) we are at a low point.  It may not be the lowest point we get, just keep that in mind as you think about investing – there is always some risk.

If you are not trying to time the market highs and lows (and unless you are an economic expert – or can tell the future) this is probably your best option.  The key term here is dollar cost averaging.  Dollar cost averaging is a term used to describe the technique of investing on a regular basis (every month for instance).  The advantage of dollar cost averaging and investing on a regular basis is that your purchase price is “smoothed out”.  Under this situation, you don’t have to worry if the market is going down or up, all you have to do is remind yourself that you are investing for the long term and keep investing.  This strategy takes emotion out of trading ETFs or mutual funds that you think are good for the long term BUT may experience some short-term price changes (also known as volatility).  And history (80+ years or so) is on your side as mutual funds/ ETFs that track indexes over that time have been great (on the whole).

So, is now a great time to take advantage of the low prices (keeping in mind that you have a long term perspective).  Or, maybe its a good time to think about starting a regular investment program.

Mutual Funds

Today’s post may be boring for some, but i know that i have explained these investments more than once to people, so here goes.

All mutual funds are not all the same thing. You can have risky mutual funds, and you can have safe (little risk) mutual funds. In fact they can be a lot of things. Also, you can have mutual funds in your IRA, outside your IRA, or in your 401K. A mutual fund is a kind of basket of something, and you invest in that basket. By holding a mutual fund, you are loaning your money to the mutual fund company, and they take your money and invest it in stocks, bonds, commodities, etc.

If the fund for example owns shares of Yahoo, and you hold shares of that fund, you share in the returns that Yahoo gives to fund, but you don’t actually own any Yahoo shares. There are two primary advantages of mutual funds, 1. professional management – someone who you choose selects all the investments and 2. diversification – instead of buying a few shares of one company, you can buy a few shares of a mutual fund, and they pool money together and buy lots of companies.

And for these advantages, you pay a fee (the “Service Fee”)to the mutual fund company (in the range of 0.5% to 1.5% normally).

There are a lot to talk about still, but just two more differentiation points.

Load Funds vs No Load Funds.

No Load funds are cheaper – the fund company only charges the Service Fee. Load Funds, charge a service fee, but also a “Sales Charge” The sales charge is an extra charge that the broker charges you for access to the mutual fund. Moneyclamps prefers No Load Funds.

Equity vs Bond funds

These are two main categories, but there are others. Equities are stocks: IBM, Yahoo, Nike, etc. that you hear about. Bonds are fixed income investments, Corporate debt, and are generally safer than stocks. Moneyclamps does not pick sides between Equity or Bond funds, as each is good for it own objectives. Also, you can have mutual funds that are mixed, some stocks and some bonds. Choosing those depends a lot on what you are tying to accomplish. But for now, just know that there are two big groups to choose between.

I know I should save and invest …

You would be amazed at how many times i have heard this statement from my peers. I heard it in college and I heard it when i started working, and continue to hear it, and I really like helping people with their money and investing choices. So, my goal is to answer this question, maybe not with a specific investment, but really i think people as this question because they are overwhelmed by the choices or are unsure of the process. I hope to make it a easy transition from knowing something and following through and doing something. I hope to help you think about money and investing differently, and I hope to make your first step (the hardest), easier, so that you in one year from now (or when you first read this blog), instead of having the same question, you can say “I have been invested for a year”. Please Let me know your thoughts and ideas for topics.

moneyclamps