To Invest or Not to Invest in a Horrible Stock Market, That is the Question

Posted: February 22nd, 2009 | Author: Mo2 | Filed under: Banks, Budgeting, Credit, General, Investing, Mutual Funds, Planning, Retirement, Stocks | Tags: blue chip stocks, dividends, Investing, long term, speculative stocks, stock market, volatility |

The stock markets are down and there are a lot of people in a really bad mood because they lost a lot of money in the stock markets. It doesn’t stop there because the economy in general is so horrible it’s pretty much affected everyone and I’m betting that my readers are feeling the negative vibe as well.

The purpose of this article is to help you decide if you really want to invest in stocks at time like this and what you should do going forward from here.

Always Think Longer Term
When you look at most things in life, you don’t want to think about what the result of something will be right away. No doubt, there are many outcomes you want to know about right away but in general you want to think about how an event can help you in the future, the longer-term. The stock market is one of those places. Except for traders that try to come up with short-term gains, many people invest in the stock market to increase their money through capital gains and dividends.

In my opinion, in the longer term the markets will improve. I cannot guarantee when it will happen and by how much, but if you stay with your plan of thinking longer term then the markets will definitely reward you for having a positive mindset. If you’re just starting to invest now, it’s a great time to begin because many great companies are valued so cheaply that you can buy many stocks at a bargain. Even if you are already invested in the markets, by adding to your investments now, not only can you average down your cost bases, you can also benefit from the potential upside that will occur eventually.

History tends to repeat itself, and after market downturns when everyone is scared of the markets, it is usually the best time to invest as the market will turn around and potentially hit new highs.

Only Invest What You Can Afford
It really depends on your risk tolerance but you should not be investing money that you cannot afford. Don’t put your food or rent money into investing in stocks if you aren’t comfortable with it. You have to use money that potentially you won’t be touching for years down the road and money that you can actually give a chance to grow without interfering by taking it out of the markets.

I would not recommend borrowing money or using margin accounts at times like this when there is great market volatility. Unless, you are extremely experienced with trading and investing in these types of markets, it’s in your best interest to be sticking to cash account investments. This way you are only exposing yourself to as much risk as the money you put it.

Buy Quality
Everything is down, but that doesn’t mean everything will go back up. Because many countries around the world are in recession, many big companies have gone under such as Bear Stearns and AIG. Potentially more companies could go under, as we might not know what some of these companies might be doing internally.

Therefore, you want to stick with the companies that are extremely strong and sustainable at times like this. You have to do your research and take what the media says about stocks. If you want to invest your own money you have to understand what you are putting your hard earned money into.

As a starting point, think of the companies that produce goods and services that are needed in our society so that we can all function. As much as the big banks have been hit hard they are still necessary for our system to operate. Many other companies that produce goods and services are needed so that our society can make our way through these dire times and into a more positive time. These are the companies that you want to invest in, and it depends on where your expertise lies. Start your research with those companies and gradually expand what you are looking at and you will definitely find very strong and worthy companies that are

If you Must Invest in Speculative Stocks…
Speculative could mean anything, but for our purposes think of a speculative stock as something that isn’t as safe as anything I just mentioned regarding companies that are strong and sustainable. These would be companies that have a chance of going under in these times of turmoil or companies that are trying to grow their way up. Either way it’s honestly very hard to determine where a company will go.

If you must invest in speculative stocks, make sure you keep your investments small in comparison to your other investments. Diversification is key, however remember that these speculative stocks could go bankrupt and bring your portfolio down. On the other hand, one of the stocks that you buy could emerge to be a huge winner and help you grow you portfolio. Either way, you don’t want to bet the farm on these stocks and know where you want to go with these investments. For example, set a goal. If you make a 25-50% return on one of these stocks (which potentially could happen) reduce your exposure.

Dividends
Dividends are great; they will keep you running in horrible times. The blue-chip stocks are the best for dividends not because they pay the highest yields, but because they will most likely maintain their level of dividends even in times of recession.

What’s even greater about dividends are when the price of a stock is low, you will most likely get a better yield on your investment. Let’s say ABC Stock is trading at $20 and their dividend is currently at 7% (which may sound high but you see quite a few of them right now). So that’s an annual yield of a $1.40.

If the stock goes up in three years to $30 then your return would be $10 + $4.20($1.40 x 3) = $14.20 per stock. That’s a 71% return in three years! Not too bad to be honest.

I’m not saying every stock is going to perform like that and I don’t want you to be going out there buying stocks that are $20 with a 7% dividend just because I wrote that. My whole point is that dividends can increase your returns significantly while providing you a steady cash flow when you really need it.

Dividend cuts are not out of the question so be sure that you are picking companies that are very stable.

Mo2 Thinks
Many people are faced with the question, should I keep my money in cash/cash equivalents or buy stocks? Again, it really depends on a variety of factors such as your risk tolerance and stage in life. You always want to think about balance in life, and investing in your portfolio is no different.

Many people say cash is king. This isn’t always true in the investment world. With inflation looming around all the time, if you leave your portfolio in cash you could actually be losing money! That’s why you need to offset inflation risk by investing, even if it isn’t in stocks.

By investing in stocks, it gives you the opportunity to grow your portfolio that otherwise isn’t possible with cash equivalent and fixed income investments. Obviously, with this potential comes the risk of your stock investments falling like crazy as they have over the past few months. But the upside potential is always there as well. Therefore, you want to diversify as you probably have heard time and time again. By diversifying even if a part of your portfolio is down, another part of it will help you get past the troubled times and into the a brighter future. Think long-term and you should be fine, don’t be misguided by the media and by short-term failures. Always keep your strategy in mind and you will be fine. Good luck!

Tomorrow, I will be writing about Retiring early by building a cash flow portfolio! Stay tuned!

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