The DOW is down at 8,000 level from its peak at 14,000 level. The daily ups and downs is so extreme that the index can move over 100 points in just a few minutes. This can make any investor — new or experienced — nervous and doubtful.
Recently, Nicole (a reader) asked “I would just like to know if right now is a good time to buy long term investments because the market is low right now?” in my article about pitfalls that you must watch out for when investing in mutual funds.
My answer is very simple, anytime is the right time to invest if you have the right long-term investment strategy in place. Personally, I don’t believe in finding the hottest investment and plow my money into it. Sure you could win big, but you could also win big by gambling or playing lottery too — but you know their returns on investment (or lack thereof).
The decision between picking a handful of the “best” investments and diversification is a personal one. For me, I believe in the latter. I am more comfortable with a diversified investment portfolio than having a handful of potential winners. By having a diversified portfolio with low asset correlation, the chances are different asset classes will rise and fall in value at different rate. This basically lowers the risk of your overall portfolio and smooth out the performance level.
Take a look at my article Everything You Ever Wanted To Know About Asset Allocation for more information about diversification and asset allocation.
Second is to invest regularly into the investment portfolio. This is easily accomplished with 401k contributions, or you can set up an automatic investment plan for your other accounts. Similar to dollar cost averaging, regular contribution allows you to buy more shares when the prices are high and less when the prices are low.
For example, let’s assume Joe buy $100 of VFINX per month:
The key thing to notice here: Joe is buying more as the price goes down, and less as the price goes up. Here’s a visual illustration:
As I mentioned earlier, the pieces within the investment portfolio tend to grow at different rates. This gives you another opportunity to buy low and sell high my rebalancing your portfolio. Specifically, once your asset allocation becomes drastically different from your original allocation, you could rebalance your portfolio. Here’s another illustration:
In the example above, you are cashing out of bonds and other non-equity investments to buy more equity — i.e., large-cap, small-cap, and international.
This is easily accomplished with 401k, but a little trickier in other types of accounts.
I know that this lazy and steady approach to investing is not for everyone, but give it a try. You may find that it works better than you think.