Related topics: investments, mutual funds, value stocks, economy, stock market
It's hard to stay cool in a hot market.
Wall Street's been booming lately. The Dow Jones Industrial Average ($INDU) has risen 15% since last summer, and the Nasdaq Composite Index ($COMPX) has gained 22%. Market spirits are up. The optimists are out in force. And after an impressive 2010, stock-market strategists are forecasting good gains again for 2011.
At times like this, a lot of investors may feel an urge to throw caution to the wind and jump in head first. After all, everyone says the market's going higher, right? You wouldn't want to miss out on the action! Maybe you should get in while you still can?
It's enough to test the resolve of the most disciplined investor.
Time to take a deep breath. Stay focused. And remind yourself, once again, to stick to your long-term investment discipline.
Yes, it has been a sharp rise. And maybe Wall Street will go higher. But maybe it won't. No one really knows. Stock-market fever is one of your biggest enemies as an investor.
Here are seven antidotes; take with half a glass of water as needed:
1. Don't trust your feelings
The real reason we all feel an urge to buy shares after the stock market has risen has nothing to do with the economic outlook or investment risks.
It's pure instinct. We're hard-wired to run with a stampeding herd and to seek safety in numbers. There's a reason for that. For thousands of years, that successfully kept our ancestors from being eaten by lions. But these feelings are a terrible guide to investing. There is no urgency. Over time, disciplined investing beats short-term speculation, hands down.
2. Don't trust the crowd, either
They're usually wrong. Time and again, studies show the public invests at the wrong time -- they get bullish and buy after shares have risen, and then panic and sell after they have fallen.
Financial company TrimTabs Investment Research found the average investor lost money during the last decade, even though the market ended up about even. And financial-research company Dalbar has found the same thing going back decades. Someone who invested $1,000 in the Standard & Poor's 500 Index ($INX) 20 years ago and left it there would have had about $5,000 by the end of 2009.
If you had followed the crowd -- buying in booms, selling in slumps -- you'd have less than $2,000. So don't listen to the crowd. They have a terrible track record.
3. Ignore the short-term news, good or bad
It may move stock prices in the near term, but it will have almost no long-term relevance, and it will quickly be forgotten.
Most of the stock market's value is based on the profits that companies will make over many decades into the future. The next few months count for little.
Analysis by Ben Inker, a director at top investment company GMO, found that even the next 10 years' profits account for only about 25% of the stock market's value. Who cares about next quarter's earnings?
4. Don't get too cheerful
The recent rise is on a lot of thin ice. The government is borrowing $1.3 trillion a year from the future and spending it now to jump-start the economy, while the Federal Reserve is printing even more money.
Our overall national debts -- including the government, households and corporations -- are already at record levels and rising.
sage advice. 50 /50 is a good prudent equity position for now, as it is win-win. the market goes up? great, your portfolio goes up and you make more than CD's or bonds. the market goes down? great, you get your chips in good and invest the rest of your cash at a low point for the long-term.
