A:

This is a classic investor dilemma. When the markets are roaring, with 15-20% returns, it is tough to imagine putting your money elsewhere. In fact, when the markets churn out 15-20% returns, people actually tend to borrow money to invest in stocks.

Of course, when the markets are down by the same amount, especially over the course of a few years consecutively, it seems pretty easy to find more productive, useful, and fun places to invest that money. Even if you're not making huge profits buying and selling houses or cars, you at least feel like you're doing something productive. However, before you trade in your 401(k) for a Ferrari or a beach condo, try to employ the following three principles.

First, every long-term investor should focus on diversification as a core principle. If your portfolio has become top-heavy with just a few positions, you'll want to consider rebalancing toward not just other stocks or mutual funds, but also toward fixed income investments such as bonds and real estate.

Second, if at all possible, you should continue to invest funds regularly into retirement and college accounts. This process of dollar-cost averaging helps to ensure that your purchases that have temporarily declined in value are offset with new purchases at much lower prices.

Third, timing the market is nearly impossible. Over the last 80 years, equity markets have continued to provide an annualized return in the ballpark of 10%. Much of this return, however, is due to relatively short bursts of growth that happened before most cautious investors regained confidence to reenter the market. To have a fighting chance at earning double-digit returns in the stock market, you'll need to have your money invested properly before the market turns around.

(For more on this subject, read The Stock Market: A Look Back, Dollar-Cost Averaging Pays, Dollar-Cost Averaging DCA, Diversification, The Importance of Diversification, Market Timing Fails As A Money Maker)

This question was answered by Ken Clark.

RELATED FAQS
  1. Why should I invest?

    One of the most compelling reasons for you to invest is the prospect of not having to work your entire life! Bottom line, ... Read Answer >>
  2. What is a good annual return for a mutual fund?

    Explore the question of what constitutes a good annual return from investing in mutual funds and the factors that affect ... Read Answer >>
  3. What's the difference between absolute and relative return?

    Knowing whether a fund manager or broker is doing a good job can be a challenge for some investors. It's difficult to define ... Read Answer >>
  4. What are the main differences between a systematic investment plan (SIP) and mutual ...

    Reduce your average cost per share on mutual fund investments using the dollar-cost averaging strategy by way of a systematic ... Read Answer >>
  5. What are the risks involved in keeping my money in a money market account?

    Setting aside funds in a money market account can be a safe investment strategy, but investors should be aware of the risks ... Read Answer >>
  6. Are money market accounts for short-term investments a good idea?

    Learn whether money market accounts are good ideas for short-term investments. Money market accounts combine aspects of a ... Read Answer >>
Related Articles
  1. Retirement

    Dollar-Cost Averaging Pays

    Get the most out of your mutual fund by using this simple but powerful strategy.
  2. Forex

    Pros & Cons Of Dollar Cost Averaging

    The dollar-cost averaging approach helps investors avoid market timing but they give up some potential for higher returns.
  3. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  4. Investing Basics

    Diversifying Your Portfolio: 5 Easy Steps

    You can never be sure of what the market will do at any given moment. That’s why a well-diversified portfolio is so important.
  5. Economics

    Riding The Bear Into A Bull Market

    How can you get back into the market to avoid missing market recovery gains? Find out here.
  6. Retirement

    The Pros And Cons Of Money Market Funds

    Find out whether stocking your money in these accounts will stand up to the test of time.
  7. Investing Basics

    5 Questions First Time Investors Should Ask in 2016

    Learn five of the most important questions you need to ask if you are a new investor planning on starting an investment program in 2016.
  8. Investing Basics

    Getting Started In Stocks

    We'll provide a step-by-step introduction on how to invest - and succeed - in this market.
  9. Active Trading

    3. Keep Building

    Follow these 5 easy steps to achieve a fully diversified portfolio you can be proud of.
  10. Investing Basics

    Choosing Between Dollar-Cost And Value Averaging

    These are two investing practices that seek to counter our natural inclination toward market timing by canceling out some of the risk.
RELATED TERMS
  1. Dollar-Cost Averaging - DCA

    The technique of buying a fixed dollar amount of a particular ...
  2. Return Of Capital

    A return from an investment that is not considered income. The ...
  3. Investing

    The act of committing money or capital to an endeavor with the ...
  4. Target Return

    A pricing model that prices a business based on what an investor ...
  5. Value Averaging

    An investing strategy that works like dollar cost averaging (DCA) ...
  6. Money Market Fund

    An investment fund that holds the objective to earn interest ...

You May Also Like

Trading Center