Investing without research is like playing stud poker and never looking at the cards. — Peter Lynch
How often have you wondered how nice it would be to invest if you can master the best way to invest money in the market? Why is it so hard to make money in the market if you can dig out financial facts in the matter of minutes by visiting Yahoo finance or any other millions of investment sites on the Internet?
We all have faced quandary to find best way to invest and grow our money in this tough economy. I don’t have a magic wand, but I certainly want to discuss facts about some investment myths — to protect and grow your money.
Let’s think through a mind of an investment banker on the Wall Street, or a so-called pundit on CNBC before we discuss these myths. These experts make a ton of money by making sure that you hear these myths over and over so that they can profit from it. How else are they going to make millions in this economy every year?
Okay, without further ado, I am going to uncover these myths so that you can act in tandem with the investment banker to make money in the market.
“Buy and hold” is the safest way to make money.
Our Web is full of those who calculate retirement income based on the average 6% return on your investment. Cool, right? Not true!
After all, in early 2009, S & P was below where it had been in 10 years before. Out of curiosity, I went back to 1960’s and found that there are 10-15 years period when index returns nothing; add inflation to it and you are losing money.
As you can see in this chart, Dow opened 1966 at 983.51 and closed in 1982 at 991.72. That’s measly 1% return in 17 years. That’s not too assuring to those who were about to retire in those 17 years.
Wouldn’t it be nice if I can predict bottom and top of each market cycle? It would be nice, but no one can predict what will happen in the few months, let alone where S&P would be in the next 12 months.
Instead, I use a simple theory — charts never lie!
I check the trend of the market by using 50 day moving average for both Dow and S&P. Once both indices break their 50 DMA, I sell my stocks and wait for a better market condition.
An alternative to buy-and-hold investing
If you gauge health of the overall market condition, you will find best way to invest your money in the market by selecting top quality, blue chip stocks — preferably with high dividend yield — to add to your portfolio once market recovers. You may not be able to buy them at the rock bottom price; nonetheless, you will be better off buying these stocks once you find both Dow and S&P in the up-trend. You can invest an equal amount of money in 5-10 stocks depending on the amount you invest, and wait till market tops.
Dollar-cost averaging is the best way to invest money
Dollar-cost averaging is the practice of investing equal dollar amounts in the market at regular intervals in both up and down markets — remains sound advice for anyone investing for the long haul according to pundits. Sounds great, right?
Well, facts tell a different story especially in the down market with so much uncertainty about the global markets. It’s really a sucker’s game where you are literally trying to catch a falling knife!
Let’s do a little sanity test. Shall we? Assume that you have a $100,000 portfolio — and invested $5,000 every other week for 9 months( Most dollar-cost averaging advocates recommend a 6-12 month period) — in 2008 market before and after the market sell off.
Here’s the result: You have lost 45.6% — even worse than S&P’s 31.7% loss — so now your portfolio is worth $54,407. And who was selling you these stocks while you were playing sucker’s game? You’ve guessed it right. Those pundits who preached dollar-cost averaging were happily selling you their stocks.
Another Achilles’s hill for the dollar-cost averaging folks is to remember that many major corporations that once dominated their niche, lost their competitive advantage. Some — like Dell — survived, but others — like Enron — are in the pages of history. If you happen to dollar-cost average in any of these stocks then you essentially purchased stock certificate to hang on your wall for how not to invest lesson.
Parting thoughts: There is no single best way to invest money in the stock market. However, you have to understand risk involved with any investment approach, including those that you hear repeatedly on financial networks or read on major finance related sites. It’s your money; invest wisely. The best way to invest is to protect your investment. Do you agree?
Readers: What is your thought about market performance for the past 10 years? Do you think dollar-cost averaging is for everyone? I am wondering if it is wise to advice someone in his retirement years to have patience.
Photo by: Gary Dunaier