wearmanyhats

This past six months is redefining the use of the stock market as a tool for retirement.  After all, it used to be that if you put money in, invested wisely in basic blue chips, or good solid mutual funds, that in your old age, you could retire and have more than enough.  Even if you sold your house and invested the proceeds, the history of performance in the stock market was enough to be wildly successful by investing.

Then came last year, and the nosedive of regular stocks.  People dumped and fled and true believers in stocks were left holding equities that had shed half or more of their value.  Even high yield dividend stocks took a beating.

Have the rules of investing changed?  After all, money managers’ mantra was “invest, invest,”  or “buy and hold.”  Has this all changed?

First, consider that before the stock market headed south, President Bush was all in favor of letting people invest their social security in the stock market.  Now no one is talking about that option.  People who advocated this recognized that some aspects of retirement should not be subjected to the volatility of the market.

Second, this was not a sector bubble.  There was no mass diminishing value of tech stocks, as there was in the crash of the 1990’s.  Instead, equity value across the spectrum disappeared.  While there might have been a few stocks that still gained in value, they were darned few.  Also, not all of the market was terribly overvalued.  Many of the stocks that took a beating had a P/E ratio of under 20.  The only big bubble we were experiencing was in the price of homes.

Knowing all of that, then, consider investing basics.  Choose a stock with a P/E of 20 or less..  Make sure it is a stock that has a positive net.  If you don’t care about the risk these stocks have, then understand why you think the company will do well.  What are their goals?

Pretend that you work for a board of investors that want to hear your reasons for buying into a company.  What would you say to them to make your case?  What would you use for facts and figures to show that it is worth investing all of these hard assets?

Some investing basics will never change.  Insiders buying is always a good sign.  A low P/E is great.  A positive net is super.  as are good news stories.

But one fundamental has changed indeed:  the market will not always go up.  It can, and will have serious corrections.

Trackback URI | Comments RSS