Getting a little older requires a few changes in behavior. I’ve long known the importance of warming up before vigorous exercise. In the last few years I’ve learned my muscles also don’t like to be thrown right into yard work. They like a gradual introduction. If I forget that lesson, they’ll spend the next day or two reminding me of it. Actually the muscles don’t seem to like yard work at all, but they protest more if there is no warm up.
Those of you looking to invest some cash for the first time or to reinvest some might want to heed that lesson.
I know many of you have cash you are itching to invest. From your letters and e-mails, it is clear that a number of you have been very conservative the last few years. Both new subscribers and established readers tell me that they have a lot of money stashed in certificates of deposit, money market funds, and conservative bonds. The extremely low yields on these investments are not producing income worth talking about. You are thinking that after the long bear market, the potential rewards of the stock market are attractive relative to the risks.
At this point you face one of the more difficult questions in investing. How do you move from the safest investments into more risky investments?
It is important to realize that, except in hindsight, there is no way of knowing the “right time” to invest. Do not think you will be able to find the bottom of the stock market and invest a substantial portion of your money in stocks at that time.
When new money is first put into the stock market, at some point during the next year the investments are more likely than not to sell for less than was paid for them. I always tell people that they should assume they will lose money for the first year. If they cannot live with that, they should not buy stocks. If they have a positive return after the first year, it turns out to be a pleasant surprise.
I always say that the stock market is only for money you won’t need for at least five years. (With interest rates low and likely to rise, today the rule also applies to long-term bonds.)
By investing at what I think is near the bear market bottom, there is a reasonable chance that after the first year the risk of a loss will be behind you, but be prepared for surprises.
The important issue is not when to buy, it is what to buy. I recommend that investors decide which type of investor they are from among the four portfolio types listed on page 10. The next step is to establish their Core Portfolios according to my recommendations.
Don’t wait for that right time to start the Core Portfolio. There are two better ways to get the Core Portfolio invested.
One way is to fully invest in the selected recommendations right away. Don’t do this if you are going to check the portfolio’s progress every day, expecting steady daily gains and questioning your decisions when there are declines. If you have a long-term view, this is the best approach.
The other approach is dollar cost averaging. Pick a period from three to 12 months. Divide the planned total value of your Core Portfolio by the number of months. Invest that amount in the selected recommendations on the same day each month. You need to make the investments each month no matter what the market is doing. Ignore the analysts on CNBC and other short-term market commentators. Do not let any current news – known as market noise – change the investment schedule.
Sometimes you will buy when the market is at temporary lows, and sometimes when it is at highs. After the portfolio is fully invested, you’ll own securities at a range of prices. The big benefit of dollar cost averaging is that it reduces the risk that you will invest the entire portfolio just before a sudden market decline.
After the Core Portfolio, work on the Managed Portfolio. This portfolio is based on my intermediate outlook for the markets. On page 10, I list the funds and also the maximum price you should pay for each investment. That is important, because a Managed Portfolio investment might have been begun a year or more earlier. You don’t want to buy an investment that is nearing the top of its run. I recommend buying right away all Managed Portfolio investments that are below their maximum buy prices. Some subscribers prefer to buy only the newest Managed Portfolio investments, but that method could take months to get you fully invested.
Finally, decide if my Invest With The Winners Aggressive Portfolio strategy is appropriate for part of your wealth. This involves more time, attention, and risk than the other recommendations and is not for everyone.
Details about my different portfolios and how to choose from among them are in the report sent to all new subscribers, How To Get The Most From Retirement Watch. If you didn’t get yours, call 800-552-1152.