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5 Rules in Investing in the Stockmarket
1. 5 "New" Rules For Safe Investing
Investors were hammered by massive declines
as a recession swept the globe in 2008
and 2009. In the midst of the chaos, experts
began calling many decades-old investment
practices into question.
Is it time to try a new approach? Let's take a look
at five trusted investment strategies to examine
whether they still hold up in a post-credit crisis.
2. 1. Buy and Hold
History has repeatedly proved the market's ability to recover.
The markets came back after the bear market of 2000-2002.
They came back after the bear market of 1990, and the crash
of 1987. The markets even came back after the Great
Depression, just as they have after every market downturn in
history, regardless of its severity.
Assuming you have a solid portfolio, waiting for recovery can
be well worth your time. A down market may even present an
excellent opportunity to add holdings to your positions, and
accelerate your recovery through dollar-cost averaging
3. 2. Know Your Risk Appetite
The aftermath of a recession is a good time to re-evaluate your
appetite for risk. Ask yourself this: When the markets crashed, did
you buy, hold or sell your stocks and lock in losses? Your behavior
says more about your tolerance for risk than any "advice" you
received from that risk quiz you took when you enrolled in
your 401(k) plan at work.
Once you're over the shock of the market decline, it's time to assess
the damage, take at look what you have left, and figure out how long
you will need to continue investing to achieve your goals. Is it time to
take on more risk to make up for lost ground? Or should you rethink
your goals?
4. 3. Diversify
Diversification is dead … or is it? While markets
generally moved in one direction, they didn't all make
moves of similar magnitude. So, while a diversified
portfolio may not have staved off losses altogether, it
could have helped reduce the damage.
Holding a bit of cash, a few certificates of deposit or a
fixed annuity along with equities can help take the
traditional strategic asset allocation diversification
models a step further.
5. 4. Know When to Sell
Indefinite growth is not a realistic expectation, yet
investors often expect rising stocks to gain
forever. Putting a price on the upside and the
downside can provide solid guidelines for getting
out while the getting is good. Similarly, if a
company or an industry appears to be headed for
trouble, it may be time to take your gains off of
the table. There's no harm in walking away when
you are ahead of the game.
6. 5. Use Caution When Using Leverage
As the banks learned, making massive financial bets
with money you don't have, buying and selling complex
investments that you don't fully understand and making
loans to people who can't afford to repay them are bad
ideas.
On the other hand, leverage isn't all bad if it's used to
maximize returns, while avoiding potentially
catastrophic losses. This is where options come into the
picture. If used wisely as a hedging strategy and not as
speculation, options can provide protection.
7. Everything Old Is New Again
In hindsight, not one of these concepts is new. They just
make a lot more sense now that they've been put in a real-
world context.
In 2009, the global economy fell into recession and
international markets fell in lockstep. Diversification couldn't
provide adequate downside protection. Once again, the
"experts" proclaim that the old rules of investing have failed.
"It's different this time," they say. Maybe … but don't bet on it.
These tried and true principles of wealth creation have
withstood the test of time.
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