It's not hard to understand the appeal of the American stock markets.
With the nation barreling toward a seventh year in the second-longest economic expansion of the 20th century, every stock market-NYSE, the American Stock Exchange, NASDAQ-is breaking new records every month, or even every week. The Dow Jones Industrial Average alone has risen more than 11,000 percent since 1982, and more than doubled over the last four years. Approximately 40 percent of adults are now invested directly or indirectly in stocks. With corporate profits high and foreign investors flooding in, indeed, it would be hard not to be tempted by the appeal of America's stock markets.
The market is not for everyone, and hard-working, otherwise-preoccupied small business owners often figure it's especially not for them. But investment educators like John W. Evans, director of national accounts for The Financial Literacy Center, argue that entrepreneurs who invest all their time and resources in a business are placing all their eggs in one basket: "If their business goes under, they've lost their entire future." Yet for as little as $50 a month, an entrepreneur can sock away a rainy-day mutual fund that may provide a valuable cushion in equity markets with double-digit annual returns.
Here are some things experts say novice investors should think about when considering whether to take stock:
"What we see in the marketplace currently with a lot of small investors," Evans says, "is that you need to have money to invest, and how people interpret that is that you need a lot of money." It's not true. You can open an individual brokerage account for $500 or so at Charles Schwab or T. Rowe Price, and pump $50 a week into investments after that. Or you can get into a mutual fund for even less. Unless you trade frequently, fees and charges are likely to be low or non-existent until you withdraw your funds.
Trust-in the individuals and institutions that administer stock funds and your money-may be hard to come by. "A plaque on the wall doesn't tell you that the person is a) honest, or b) qualified," notes Stephen E. Frank, banking reporter and contributing author to "The Wall Street Journal Guide to Who's Who and What's What on Wall Street" (Ballantine Books; $29.95). Franks says, "That's really the goal of the book, to bring Wall Street to Main Street." The book presents sketches of the brokerage firms, banks, exchanges and regulators a novice investor will encounter, how they work and interact.
"Whether you have a million dollars or $50, it's not going to do you any good unless you have information," Evans agrees. "Information is key." The Internet has replaced the library when it comes to locating most investment information, says Douglas Gerlach, author of "The Investors Web Guide" (Lycos Press; $39.99). "It's important not to be overwhelmed," he warns. "You can just get lost right away."
But Gerlach's book, with enclosed CD-ROM, offers thousands of (mostly free) sites such as www.investorwords.com (more than 4,000 investing terms explained); www.naic.org (investor clubs and much more on safe investing strategies); www.sec.gov (free annual reports, etc., direct from the Securities and Exchange Commission); and his own www.investorama.com (thousands of links to investment sites). "I wouldn't send anybody to the library anymore," Evans says.
For those who need a guiding hand, financial advisors are available to provide a sounding board, a second opinion, or just an objective observer. "The main advantage to a small business owner is that it saves you a hell of a lot of time, and time seems to be the biggest factor nowadays," says Barbara Levin, executive director at The Forum for Investor Advice in Bethesda, Md.
The forum offers free brochures on how to choose an adviser. Frank, at the Wall Street Journal, suggests verifying any credentials and checking for disciplinary actions with your state's banking commission or the federal SEC. As with all investment issues, the more questions you ask, the better. "It's just like dealing with a doctor," Frank says. "You can rely on the doctor to dispense medical advice and treatments, but a patient who informs himself about options will usually receive better medical outcomes over the long run."
(Next month: Tips for staying out of trouble in the markets.)