After a long rise, U.S. securities exchanges suddenly seemed uncertain. Gold prices plunged to historic lows. Troubled foreign markets sent shock waves through the American investment community. Twenty-five years ago, it seemed like a terrible time to get into the stock market.
Yet the investors who persevered, Robert A. OHara says, have no financial concerns at all at this point. The vice president for development at the National Association of Investors Corp. in Madison Heights, Mich., recalls business magazines in the 70s full of predictions about the demise of the individual investor. NAIC lost more than three-quarters of its membership in the mid- to late-1970s before a resurgence in the 1980s.
Similarly grave prognoses now haunt the U.S. stock market, as concerns about the fate of Asia keep many would-be investors on the sidelines. Yet observers say the world market is different today. The Cold War is over. Capitalism is being embraced around the world. Capital flows into and out of investments globally with greater ease than ever before. Even after the markets early-summer stumble, returns remain at or near record highs.
Its been estimated that approximately 40 percent of Americans are invested directly or indirectly in the stock market. That estimate includes investments such as mutual funds. While the savvy novice investor is first advised to stay alert, its never been easier to get started in equities. Part One of this story (see Opportunities for July) introduced some simple, cheap tools new investors could use. Offered here are a few relevant tips for staying out of trouble.
Know your risk tolerance. Evaluate how much can you afford to lose in the worst case without harming your quality of life. Think about the downside before you ever make the investment, says Alvin D. Hall, author of Getting Started in Stocks (John Wiley & Sons). Consider starting in mutual funds and using the experience gained there to dabble in individual equities.
Understand what you are buying. If you cant understand whats happening with American Online or Yahoo!, then you shouldnt be buying them, Hall says. Start with stocks in the industry you already know; use the education you get to branch out slowly.
Buy quality. Initial public offerings, suddenly-hot properties, penny stocks and such are for insiders, speculators and people with money to burn. Getting started, a boring but reliable stock like Coca-Cola, IBM, AT&T will produce solid returns and an opportunity to learn how to read the newspaper stock pages, annual and quarterly reports, and the vicissitudes of the markets.
Consider joining an investment club. We encourage people to start in a club, and within two years they are usually on their own, OHara says. A club gives you the benefit of other peoples perspective and experience, at a very low cost and little continuing obligation.
Dont fret about scams and con artists. Those concerns are always there, OHara notes, though probably less so with our membership. Complex investment instruments like commodities, options and futures are more prone to con-artists than simple securities, especially if an investment club is there to hold your hand. Hall adds: The only way someone can get taken is when they dont do their homework.
Invest a little every month. This is called dollar cost averaging. Besides assuring historically strong returns on investment (when the stocks selected are not dogs), dollar cost averaging also teaches the discipline of not giving up when the markets seem to turn south. If youre not prepared to stay in the market for at least three to five years, you probably shouldnt be in at all, according to Hall.