Buy! Hold! Sell! What's an investor to do?

Today's investors are being inundated with information. Needless to say, there are countless magazines, financial news channels, television ads and web sites vying for your attention and dollars. Everywhere you turn, someone is trying to give you his or her opinion and "advice" regarding the proper way to invest. It is now just as common to hear your grocery store clerk or next-door neighbor mention what the Dow Jones did today as it is a stockbroker.

So what do you do and whom do you listen to? When should you move your money and when should you stay put? What should you do when the stock market is up? What should you do when the stock market is down? You may be surprised that, in most cases, the answer to these questions will generally be the same. Here are some points for you to consider for retirement saving:

Invest Regularly
The ideal and most convenient way to invest is through payroll deduction such as your 401k plan. A recent study* compared three investing approaches: One person invested $100 twice a month ($2,400 per year) through payroll deduction. A second person invested the full $2,400 once per year but happened to pick the worst day- the day the stock market was at its highest and about to head down. The third person invested the $2,400 once per year on the best day - the day the market was at its lowest, about to head up. All three were hypothetical investments made 1/1/70 - 12/31/99 in the S&P 500. Can you guess the results? Would you guess the third person overwhelmingly outperformed the other two? Nope. They were almost identical. The first person earned 15.8%, the second person earned 16.5%, and the third person earned 15.4%.

Don't "chase performance"
Investors learned this lesson the hard way with the recent boom and bust of the technology craze. It is human nature to move your money where the action is. In the 90's, even the most sophisticated investors and professional money managers were guilty of moving excessive amounts of money to technology stocks and high-flying mutual funds. When the technology bubble burst, so did their retirement savings. Even worse, many investors moved what was left of their savings to bonds and cash. This type of move almost guarantees missed gains when the stock market begins moving forward again. For example, in the fourth quarter of 2001, the Dow Jones gained nearly 20% while the NASDAQ was up nearly 40%. By comparison, those people who moved their money to bonds or cash to "escape further losses", on average, would have earned one percent at best during that period.

Market timing does not work
The value of $1 hypothetically invested in stocks at year-end 1925 grew to $1,113.92 at year-end 1995.** However, the same investment over that 70-year time frame only grew to $10.16, if it missed the 35 best months of returns. Long-term investors should stay fully invested because market timing simply does not work.

Bear Markets and recessions are just part of investing
Since 1926, the stock market has suffered through bear markets a bit more often than once every five years and, if you had the misfortune to buy stocks just before a bear market began, on average, it took three and a half years to break even.*** Since the average bear market lasts about 18 months, one may conclude that the remaining three and a half years of that five year time frame, on average, would consist of a bull market. Including the most recent recession, which appears to be over, the U.S. economy has had 10 recessions and 10 recoveries. There will undoubtedly be more bear markets and recessions in the future. Based on history, you may take as much risk with your investments as you are comfortable with until you are within five to ten years of retirement.

Conclusion: Form a plan for retirement and stick to it
You can avoid a lot of stress and wasted time by diversifying your portfolio among various categories of stock mutual funds and holding them for the long-term. Other than periodically monitoring and re-balancing your account, you should not have to change anything until you are nearing retirement. Quite simply put, saving for retirement is a long-term endeavor until you are within five to ten years from retirement (or the date you will need to draw income from your savings).

Both in good times and in bad, your investment strategy should be virtually the same- investing primarily in stocks or stock mutual funds and slowly shift to bonds and/or bond funds as you near retirement age. Short-term market fluctuations, whether up or down, should not determine your long-term strategy although you should not lose sleep over your investment allocations. There is no crystal ball to see what lies ahead in the economy or the stock market so all we have to look at is history. So that "advice" your next-door neighbor gave you is probably not your best resource for investment decisions.

Sources
* The American Funds Group: The Trail To Retirement (Basics of Long-Term Investing)
** Newsletter: Wealth Navigation
*** Kiplinger.com - Value Added By Steven Goldberg