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Article

Tread carefully when stepping into stock market

This is a difficult time for anyone trying to build a portfolio of savings and investments capable of providing a financially secure retirement. According to the Center for Retirement Research, more than half of the baby boomer generation will not be financially prepared for retirement even if they work until the age of 65.

This is a difficult time for anyone trying to build a portfolio of savings and investments capable of providing a financially secure retirement. According to the Center for Retirement Research, more than half of the baby boomer generation will not be financially prepared for retirement even if they work until the age of 65.

With corporate pension plans now largely just a memory, it’s up to individuals to design their own financial plans for retirement, and that calls for making some tough decisions.

I can’t remember a time when the economy has seemed more uncertain and fluid. Are interest rates for savings set to rise after a long period of stagnation, or will they continue to remain mired abysmally low in the foreseeable future? Is it time to start investing in the stock market again, or is it better to wait? How about real estate? Is this a good time to buy or sell a house? These and other questions about our economic future are never easy to answer, but they seem especially problematic in mid-2011.

Taking the plunge
Arguably, one of the most pressing of these decisions is whether individuals should be investing a significant portion of their savings in the stock market.

For anyone who watched as their 401(k) or IRA plans took a terrible drubbing during the market meltdown of 2008, continuing to invest in stocks can be a troubling thought. In just eight trading days in October 2008, the Dow Jones Industrial Average dropped a total of 2,399.47 points or 22.11 percent. By the end of the year, the market had dropped 33.84 percent. And it wasn’t over yet; by the close of February 2009, it had dropped an additional 19.02 percent.

Despite that nerve-shattering experience, there are some convincing arguments that present circumstances offer investors an opportunity to profit significantly from a coming rise in stock prices. One of the most persuasive is offered by stock market history.

Previous to 2008, stocks have fallen by 40 percent or more six times in the past century – 1906, 1916, 1929, 1937, 1973 and 2000. If you had invested in stocks on any of those five occasions, your return over the following five years would have averaged 8.6 percent per year above the rate of inflation.

Compare that to the returns presently offered by other investment vehicles. A one-year CD will get you about 1 percent in most areas today. The present yield on 10-year government bonds is about 3.4 percent. Even the Series I bond offers a current yield of less than 1 percent. And I don’t need to mention the almost nonexistent interest return on such investments as money market and passbook savings accounts.

Expert opinion
All of this would seem to suggest that this is a good time for investors to return to the stock market. In this regard, I asked Michael Wall, founder of Wall Financial Group, a Pennsylvania wealth management firm for his thoughts.

“Whether or not you should enter the market at this time depends on many factors,” he says, “including how much money you have in your portfolio, and whether you need to use the money you’re thinking of investing in the short term for any large expenses. Also, your current age and whether you are currently taking income from your investments are factors to consider. There are several other issues, but let's assume that your answers to these questions would suggest that you should be considering stocks for your portfolio.

“In that case,” Mr. Wall says, “my thoughts toward the market at this stage would be to enter, but to enter cautiously and fully understand what you are buying before you invest. We are sitting right now (April 2011) in a place where the S&P 500 is bumping against a resistance point that was also a ceiling for the market in February 2007 and again in May 2008.

“There are many concerns in the world, but that doesn't mean there aren’t opportunities in certain areas. We know that inflation is going to happen and so one good idea would be to make money when that occurs. One way to do that, if you are willing to take a little risk, is to short treasuries. I also believe oil is a good area to consider for investment.”

Time to take action
As for me, I number myself among those who feel that now is the time to increase your investments in the stock market. I wouldn’t want anyone to think that I’m suggesting you start picking out individual stocks to add to your portfolio, however.

As I’ve said in the past, the way that I believe the average person should invest in stocks is through the purchase of mutual funds. It’s simply too complicated and too risky for the small investor to pick individual stocks. No matter what your personal preference in terms of industry or generic group, there is a mutual fund designed to fit your needs. Among those are the so-called index funds, designed to match one of the major stock indexes such as the Dow Jones Industrial or the S&P 500.

The tooth-grinding challenge of trying to beat the market through individual stock selections is like tilting with windmills. It may be OK for Don Quixote, but not for the average investor.

At the very least, the managers of the major funds have some insight into the complex and sometimes dark subtleties that rule Wall Street these days. They may not always be right, but I’m confident that they’ll do a better job of picking individual stocks than most of us can do.

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