WEAK MARKET INVESTMENTS
No investment is a sure thing. Any company can have serious problems that are hidden from investors. Many big-name companies such as Enron, WorldCom, Adelphia and Global Crossing, to name just a few, have fallen. Even the most financially sound company with the best management could be struck by an uncontrollable disaster or a major change in the marketplace, such as a new competitor or a change in technology. Further, if you buy a stock when it’s hot, it might already be overvalued, which makes it harder to get a good return. To protect yourself from disaster, diversify your investments. This is particularly important if you choose to invest in individual stocks instead of or in addition to already-diversified mutual funds. To further improve your returns and reduce your risk when investing in individual stocks, learn how to identify companies that may not be glamorous, but that offer long-term value.
As we are now facing markets that are showing decided weakness over the past 7 trading sessions [DJIA down 675 points] it is prudent to prepare for a continued market downside. Under these market conditions if the stocks you’re purchasing still have stable fundamentals, then their currently low prices are likely only a reflection of short-term investor fear. In this case, look at the stocks you’re interested in as if they’re on sale. Take advantage of their temporarily lower prices and buy up. But do your due diligence first to find out why a stock’s price has been driven down. Make sure it’s just market doldrums and not a more serious problem. Remember that the stock market is cyclical, and just because most people are panic selling doesn’t mean you should, too.
You might also consider diversifying into asset classes, like bonds, treasuries, money market funds, international stock mutual funds or exchange traded funds(ETF). Since the S&P 500 stocks are all large-cap stocks, you can diversify even further and potentially boost your overall returns by investing in a small-cap index fund or ETF. Owning a mutual fund that holds several stocks helps diversify the stock portion of a portfolio, but owning securities in several asset classes helps diversify the complete portfolio.
In the end, the most important thing when it comes to your investments is to monitor the overall trend in the market, review your positions daily and always use stop loss orders to minimize potential losses.
