It is an understatement to say that many investors have had
frustrating experiences over the last several years. First there was the
bull run of the 90s. Many investors failed to take full advantage of the
returns available because of poor – or no – planning, and because of
emotionally driven investment decisions.
Coming off the high of that bull and into the extreme low of the bear
has taken an obvious toll on account values. While it was difficult to
gain much ground in any investment during the last three years, those
investors that at least held their ground are now ready for better
times. Now that the markets seem to be picking up steam, a question that
is prudent to consider is,
"How can I do it right this time?"
Any good coach will preach nonstop that you must learn and practice
the fundamentals. It is no different in the world of investing. Here are
three investment fundamentals to learn and practice no matter what.
1) Have faith, not fear. Over the centuries, our economic system
has seen war, peace, depression, recessions, market crashes and
terrorism. Yet through it all we survive and thrive. Is it not finally
time that we admit that the optimists always end up being right? Chicken
Little has been given far too much credibility over the years.
Fundamental number one: To avoid making big investment mistakes, have
faith in the future, not fear. Fear will paralyze us into inaction,
which always comes back to haunt us.
2) Use equities. Perhaps you have been frozen by fear into
inaction over the last several years or months and are seeing those
microscopic returns in your CDs or money market accounts. Again we see
that after times of uncertainty like we experienced in Iraq, free
markets return to normalcy and gradually grow over time. This is an
inherent characteristic of capitalism. Why? The simple answer is that
free markets work. Let them work for you this time. Fundamental
number two: If you have five years or more before you need the money for
consumption, then buy equities, forget about them and let the market do
the heavy lifting.
3) Diversify properly. It is one thing to buy stocks after you
realize that it is the only place to be in order to beat the cost of
living; it is another to do it properly. Very few investors have enough
capital to diversify properly by purchasing hundreds or thousands of
individual stocks. (And it does take that many, by the way.) That is
where institutional asset class funds ride in on a white horse.
They allow you to diversify properly among all the companies in a
particular asset class, starting with the first dollar. You can have
complete faith in capital markets and agree that you need to be in
stocks, but if you ignore this last fundamental, you could be
disappointed. Fundamental number three: Sell the individual stocks and
buy the market by using institutional asset class funds.
Apply theses three fundamentals and you will do it right this
time!
