Investing in diversified funds is best bet

The stock market’s continuing volatility is causing many investors to sell their investments.

Have you sold the stock mutual funds you own, figuring you will ‘get back in’ when prices resume an upward path? If so, here’s a lesson from last year.

I examined the 2007 performance of the Standard & Poor’s 500 Index. As the financial press will tell you, the S&P grew 5.5 percent for the year. But in my review, I wasn’t interested in what the gain was; I wanted to know when the gain was earned.

The result was very interesting indeed, as the entire profit for 2007 occurred in a single week.

That’s right: The entire 5.5 percent profit occurred from Nov. 21 to Nov. 28.

If you track 2007’s daily performance of the S&P, you find that on Nov. 21 the index was the same as it had been nearly 11 months earlier on Jan. 1.

In other words, if you had invested on the first day of 2007, you would have experienced nearly 11 months of incredible market volatility ‘ the market rose sharply in the spring then fell dramatically in the summer and fall ‘ only to be back where it started on Nov. 21.

And then ‘ from Nov. 21 to Nov. 28 ‘ the market jumped 5.5 percent!

And that proved to be the high point of the year: the market value on Dec. 31 was the same as that of Nov. 28.

Do you think you could have predicted that the entire year’s profit would occur in a single week ‘ or that you’d have been able to predict which week that would be?

This demonstrates why you shouldn’t try to guess what’s going to happen next in the financial markets. Prices tend to move in short, dramatic spurts that are impossible to predict accurately.

Once we admit that we can’t predict exactly when the profits will come, we are able to set the proper investment course: simply remain invested all the time. By owning throughout 2007, you’d have captured the gain without having had to worry when it was going to occur.

Thus, the only effective, sure way for you to achieve the long-term returns that the markets offer is to be fully invested at all times ‘ even when you don’t want to.

And if it bothers you to watch the daily gyrations of the markets, then don’t watch!

THINK TWICE ABOUT

THAT ‘HOT IPO’

We’ve all gotten a pitch for a ‘can’t miss’ investment opportunity involving some hot young company about to ‘go public,’ offering shares to investors for the first time. Resist the temptation to invest and walk away from these so-called opportunities.

Statistics show that the vast majority of initial public offerings go down in value.

‘But Ric,’ you say. ‘I’ve heard that this one is going to be ‘the next Google.’

Well, if it indeed is ‘another Google,’ you’ll have no chance of buying the shares at the initial offering price.

When a company goes public for the first time, it issues a limited number of shares to the public for a certain price. The shares are sold by a brokerage firm hired to launch the IPO. Since there is limited availability, guess whom the brokers call first? Their biggest and best customers, of course: large institutional investors.

In other words, if the IPO is really a great investment, the institutions will buy every share and you won’t be able to buy any. Thus, the only way you can buy shares is if the Wall Street big shots have already said ‘no’ to the deal. If they don’t want to buy, why do you?

In other words, you can’t buy the shares you want, and you don’t want the shares you can buy!

Besides, you shouldn’t be buying individual stocks anyway. You should be placing your money into a properly diversified stock fund consisting of hundreds or even thousands of stocks.

Financial Adviser Ric Edelman is the author of several best-selling books about personal finance, including ‘Ordinary People, Extraordinary Wealth’ and ‘Discover the Wealth Within You.’ You can e-mail him at [email protected].