Smart Advice for the HuffPost Investor: Is Now the Time to Sit on the Sidelines?

Question: Isn't this the time for you to tell would be investors that it is not an investors market and they need to keep their money on the sidelines?

Answer: It is never the time to give that advice. Individuals who can stay in the market for a minimum of 4 ½ years should always be in the market. The key is to be sure you have the right asset allocation.

If you can't stay the course for that long you should invest in FDIC insured CDs, money market accounts or Treasury Bills.

Investors with a longer time horizon run a meaningful risk when they jump in and out of the markets. The markets move in a random manner. Trying to predict the highs and lows is risky business. All we really know is that, over time, the world's markets increase in value.

One study looked at gains and losses in the markets over a 10 year period, consisting of 2516 trading days. Over this time period, only 20 trading days made up 100% of the returns! I don't have the ability to pick those 20 days. No else does either.

Rather than telling investors to stay out of the market, I would advise them to determine their asset allocation. They can do this by taking a free and interactive asset allocation questionnaire at www.smartestinvestmentbook.com. They should then invest in a globally diversified portfolio of low cost index funds, readily available from well-known fund families like Vanguard and Fidelity.

In relationships, absence sometimes makes the heart grow fonder.

The reverse is true for investors. You never want to be absent.

Question: Do you see ETFs as advantageous as index funds?

Answer: ETFs are becoming very competitive with index funds. They often have lower expense ratios and may even be more tax efficient.

Some problems with ETFs include the cost of the bid-ask spread and the necessity of having a brokerage account, requiring the payment of commissions when you buy or sell them.

However, for investors living in areas outside the United States where low cost index funds are not readily available, I view ETFs as a viable alternative.

One alternative for these investors is an ETF that tracks the performance of the world's markets. The iShares MSCI ACWI Index Fund (NASDAQ: ACWI) tracks an index of 2,884 different stocks from developed and emerging markets in every investable market in the world.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.

Comments

[AllenD]

"The key is to be sure you have the right asset allocation. "

And what would that be? I suggest Canadian based oil, gas and gold stocks (to take advantage of a falling dollar).

"I view ETFs as a viable alternative."

There are some very good ETF's to hedge against the current Bush recession and marlet implosion. One of my favorites is this one: http://finance.yahoo.com/q?s=SKF

[WIpatriot]

Stocks? Stocks are paper, not worth much.

[markie1111]

as so as the gnnie mae mess is over, i'm back in the market with finamcials and midcap tech.

[moAb]

Mr. Solin, while your advice is "tried and true" one could also assert it is tired and trite. These are times much unlike any we have ever seen. Suggested reading list: try anything by William Oneill, George Soros, Dr. Leeb, Kevin Phillips, books re: Jesse LIvermore, Peter Bernstein.

[themodernleader]

Only mascohists and fools would invest in this market. Buy gold and other commodities on dips. After the great Market Crash affecting the entire world, buy into economic systems that respect the laws of economics, for example, Gewrmany, Japan, China, Taiwan, South Korea.

[WIpatriot]

Thanks, tml.

[Cynth]

It depends on where you're investing. Some stocks (healthcare, education, high tech, ...) are doing quite well. And value investors can still have a field day...

[swift goat pet for truth]

NO!

The time to sit out was six months ago.

[blindhog]

I am not smart enough to know when to get in and out based on my own portfolio, but I want to comment on the anger today about short "rumors". I just wonder how illegal they are compared to a CEO giving a rosey outlook when in fact the company is in trouble. Just a thought.

[cylindar]

Yes, the right asset allocation is very important and the ability to stay the course is important. Very good advice!

[FatherWolf]

With the bad financial news today, it sounds like real serious panic is starting to set in. Just how low will the Dow go?

[moAb]

Thinkin' 10K, more or less.

[drkazmd65]

Probably about on maAb - that would mean a drop of about 28-30% off the ~14K high.

Take into account the relative decrease in the value of the dollar relative to foreign currencies, the effects of real inflation, and the likely overvalue of the market in general prior to last autumn - and that level of decrease is about right.

That is - unless more sh*t hits the fan RE: Iran, or we Americans are idiots enough to elect McCain. Then all bets are off as to how far the market is likely to drop.

[Cathexis]

Swimming at the beach is a historically pleasant pasttime. But if the Red Tide drifts in or a fin is sighted, it is prudent to advise people to leave teh water, temporarily.

Folks, after more than seven years of GOP pseudo-economics, the Red Tide is here. I got out of equities a few months ago and don't regret that opportunity to have lost capital at all. And IMHO, there is still too much algae floating below the surface to safely re-enter. I'm not about to subsidize someone else's safety net by jumping back in now.

[Idytme]

" the biggest daily point gains in stock market history have come in bear markets, or periods when stocks were in confirmed down trends."
"Ten of the largest point increases for the Nasdaq composite, for example, occurred in the 2000-2002 bear market. Four of the top five all-time point gains for the Dow also came in the last bear market."

http://www.usatoday.com/money/markets/2008-03-12-bear-market-rally_N.htm

Just one, very conventional source.

[moAb]

Checkout 'Trade Like a Shark' on this issue. Might surprise you.

[Idytme]

"It is never the time to give that advice."
Yes there does come a time when a financial advisor should give that advice. A financial advisor, presumably is taking up time studying the overall market conditions, time that their customers do not have while they are doing *their* job.
To just tell someone they have to determine their own risk (which no one really knows until the money is actually leaving the balance sheet) and just buy and hold is a cop out.
There are BIG things going on in the economy right know that are quite alarming and these alarms are going off in many different areas.
Buy and hold - easy advise to give, the customer determines his own risk and the advisor does not get in trouble if there is a market bounce. My experience with financial planners (having taken most of all the courses to be one, only to be disgusted with the whole profession) is that they spend 80% of their time getting new customers. They put people in products that either give them the highest fees or the least hassle by being asset manager type funds. They have no idea how their individual clients are doing, but know the mantra "keep buying" very well.
We are in very unusual market conditions, gas going out the roof, financial institutions in big trouble, commodities and inflation going skyward, unemployment going up, the mortgage mess and a whole lot more.
It is time to start giving advice.

[Herm]

Agree wholeheartedly. Stock brokers, though, don't pay much attention to 'buy and hold'. They make their money churning accounts, particularly those of customers from whom they have not heard in years. Some brokers don't even bother to run their 'sell this stock and buy this stock' advice by their customers when experience tells them their customer doesn't have a clue when it comes to stock valuation anyway. As long as the current quarterly statement is positive at least a majority of the time, it won't trigger a phone call from the customer. And no one knows better than the stock broker the range of interest rates available to the customer - and this is key - and how much less the customer will settle for when the alternative is for the customer to get involved, even miminally.
Mercedes cars have to be traded occasionally, granite countertops have to be replaced with new granite countertops, etc.

[Idytme]

Yes, I agree with you about stock brokers. Financial planners are not the same thing as stock brokers though, or they shouldn't be. They should look at the big picture, taking everything into account - retirement, wills, taxes, pensions and all of that.
"Fee only" FPs charge based on time spent, like how you pay a lawyer. (what I'd recommend)
Other FPs do not charge but make money based on the products they sell you.