Novice investors may consider this a time to invest

The economy is down, no one can argue that.  Exactly how far down is a matter of conjecture, and the subject of a lot of economists, investment strategists and talk show hosts.  But for the novice investor, the time may be right to start learning about investing.  Prices are low; they may go lower, sure, but a lot of experts think that the market is starting to claw its way back.

When considering investments, there are four hard and fast rules: 1. Diversify your investments; 2. Do your own homework; 3. Use dollar cost averaging to your advantage; 4. Invest for the long term.

One word: Diversification

The importance of diversification in investing goes all the way back to the old saying, “Don’t put all your eggs in one basket.”  Old sayings get old because they’re true and this one is dead on when it comes to your nest egg.

Diversification involves investing in more than one category, such as stocks, bonds and cash.  Yes… cash is an investment.  Everyone should have an emergency fund of $1000 and three months worth of bills in a savings account.  Some would argue more, but that’s their opinion.

Investors can achieve instant diversification by investing in mutual funds or index funds.  Most brokers have them available and investors usually have access to any number of them through Internet investment websites.  The characteristics of mutual funds are as wide and varied as the people who invest in them.  Some are aggressive, some conservative.  Most are categorized by growth versus risk and it’s OK to put money in several types (in fact, it’s recommended.)

Mutual funds invest in stocks, bonds, and yes, they have cash reserves, too.  They may also invest in options or futures, and any number of other areas.  Index funds usually invest in all of a category of stocks, usually blue chips, but can also invest by industry or category.

The most important thing to consider is risk and reward, which depends upon where you are in life.  If you are young and have many years till retirement, you can afford to take more risk than someone who is 60.  That person’s investment requirements are much different.  That’s not to say, however, that someone nearing retirement should avoid risk.

Do your own homework

It’s nice to be able to depend on an advisor, but investors can get burned by an investor or company who has self-interest at heart. Investors need to make sure to research the company and the funds they represent prior to signing a contract.  Objective information is available on the Internet.  Forums of all kinds are at your disposal.  Make sure you’re comfortable before you commit to anything, and always use a reputable company that has a good track record.

Steady as she goes

Investing is something that should be done on a regular basis.  Find something you’re comfortable with, and plan to buy shares every pay period.  This is called “dollar cost averaging” and is a selling point usually for mutual funds, but can be used in any investment category.

Let’s say for instance, that an investor puts $200 a month in a mutual fund and that shares are selling for $40 a share.  That’s five shares a month at the current cost.  Then, the market goes up a bit and the cost jumps to $60 a share.  The shares he owned have gained in value, but the shares now cost more to buy, and he’s buying about 3-1/3 a month.  Then, the market dips and the cost drops to $25 a share and he’s buying eight shares a month.  When the market evens out, he has bought fewer shares at the higher price and more shares at the lower price, which will mean a net value increase greater than if he had bought all the shares at once when the market started going up.

Investing is a marathon, not a sprint

Buyers should invest for the long term. Although some still do it, day trading is practically extinct. Investors should ride out the highs and lows of the market and look do their practical best to not touch their retirement portfolio.  There are, of course, exceptions, and many invest for different reasons, such as their children’s college education.  Emergencies happen.  But the retirement funds should only be tapped as a last resort.

People investing to make a quick buck run the risk of losing that buck.  The person who invests to let that buck grow over a period of years will see the greatest return.  That’s not to say that you should hold on to stocks or funds that are losing money.  If one category is losing, one (or more) is gaining.  Move the money around, but don’t abandon ship at the first sign of a downturn.

One final word about investing:  Don’t obsess over it.  If you have more venture capital than you can count and can gain or lose millions with a few ticks either way of the Dow, OK… obsess.  But if you’re just starting out, check on your investments once a week and keep track of the trends.