Buying Stocks 101

With all of the media focused on the economy at the moment, it seems impossible not to feel some concern about our investments.  And while concern in some areas might be simply an overreaction, concern with your stock portfolio isn’t.  Just a few months ago, we were debating the virtues of a Roth IRA or how to properly execute a 401K Rollover.  Today, where stock investments are held is the least of our worries.  We are in a very real period of adjustment in the markets globally, and many companies are seeing their stock prices plummet.  Some would argue that we are merely seeing a correction on paper, which will eventually bounce back to previous levels when the markets stabilize.  Though it may be that stock prices will recover, what is your money doing for you in the mean time?  The answer: nothing good.

The period of time from the high value of your portfolio last year to the same value at which point the market does correct itself - that is a period of time when your money is not working for you.  It is not growing your net worth.  It is not paying you dividends (like it was).  It is not safe.  In fact, it is at massive risk.  Therefore, it is prudent that we take this moment, when our passions are engaged, to discover what we can learn from this massive market correction.

Lesson #1:  Stocks are not a replacement for Savings Accounts

When your money is invested in the stock market, it is still “in play” so to speak.  It is at the mercy of the market and the world economy.  If your money is in a FDIC insured bank, it is at least guaranteed safe up to the amount it is insured for, backed by the full faith and credit of the federal government.  Now you may say that faith in the federal government isn’t so great right now, and I wouldn’t disagree.  But the bottom line is that it would take the failure of the central U.S. government to risk your money in the bank, and if it happened that the federal government failed - your savings may be just one of many worries at the time.  Bottom line - if you may need that money to survive, don’t risk it in the stock market.  That’s what savings accounts are for.

Lesson #2:  Nothing lasts forever - Have an exit strategy

Remember the boom in the 90’s?  How ’bout the bust in the early years of this decade?  Everything ebbs and flows, runs in seasons - especially the stock market.  If there is a time of prosperity and recovery, there will inevitably be a period of loss and constriction.  After the losses at the turn of the century, heavily weighted in tech stocks, many investors returned to the market, buying stocks in force, scooping up “good deals” and driving the market back up.  And while there were some good deals, and many of us benefited in our 401Ks from the upsurge in value, it was inevitable that we would see another downturn sooner or later.  And it happened to be sooner than most thought.  Risky moves by investment banks and hedge funds, the real estate bubble bursting, and massive government expenditures on defense, created an unstable environment in all sectors.  Bottom Line:  If your going to get in the stock market, make sure you have a clear strategy for getting out when the time comes.

Lesson #3:  You should never have 100% of your investments in Stocks

You’ve heard it before - diversify, diversify, diversify.  Well, the problem is that many people diversify within just one investment type.  For instance, they may buy a good mix of tech, blue chip, pharmaceutical, and retail stocks.  That’s great - but they’re still all in STOCKS!  They may be protected from downturns in a sector of the economy.  But they aren’t protected if confidence in the economy itself is shaken.  Bottom Line:  Keep a good mix of stocks, bonds, commodities, metals, real estate holdings, etc.  Don’t put all of your eggs in any one basket.