According to a poll conducted by Prudential, 58% of respondents “have lost faith” in the stock market. Even more stunning, 44% say they will NEVER invest in the stock market again. Never ever!
What that tells me is there’s still a lot of buying power on the sidelines. Call me a cynic, but people often say one thing and do another.
I’m sure there are some investors who got so burned by the collapse in 2008 and 2009, that they really never will put another penny into the market. They’ll cower in fear, with all of their money in gold or bury their cash under the floorboards. And while that might keep their money secure, it’ll never produce wealth.
If you’re a long-time reader of this site or subscribe to Investment U Daily, you know that we don’t try to time the markets. That’s a fool’s game. Sure, a market timer might make a great call now and then, but I don’t know any who are consistently accurate.
So rather than the futile exercise of trying to figure out the exact moment to buy or sell stocks, stick to our Four Pillars of Wealth to achieve your financial goals. The results will be better and you’ll be able to sleep at night.
1. Stick to an Asset Allocation Model – Investment U follows a formula that won Dr. Harold Markowitz the Nobel Prize in finance in 1990.
2. Adhere to Safety Switch – Buying a stock is easy. Knowing when to sell is the hard part. This way we let our winners ride and cut our losses before they get too big.
3. Understand Position Sizing – Invest no more than four% of your portfolio in any one stock. That way if things go wrong, no one particular holding will sink your entire portfolio.
4. Cut your Expenses (Including Taxes) – Invest in no load funds with low expense ratios like Vanguard index funds. Also, choose closed-end funds that trade at a discount instead of open-end mutual funds with up front fees or loads.
You can potentially lower your taxes by not selling your gains for one year, so that they qualify for the long-term capital gains tax rate (rather than the higher short term), avoid actively managed funds in your taxable accounts and keep your high-yield investments in your IRAs or other tax-deferred accounts.
The markets are a little tough right now. The financials, like Goldman Sachs (NYSE: GS) and the Financial Select Sector SPDR (NYSE: XLF), look awful. Typically, it’s difficult for the markets to rally without the help of the financials.
Several other sectors such as networking, transportation and utilities are weakening. One that still looks strong is the drug and biotech sector – although that could change after this week’s annual meeting of the American Society of Clinical Oncology. It’s the biggest cancer meeting of the year and biotech stocks typically sell off for about a month after the meeting.
None of this is reason to panic or dump your stocks.
Consider following the Four Pillars of Wealth and leave the panicking to those who have ridiculously sworn off the markets forever.
Marc Lichtenfeld is the Senior Analyst at InvestmentU.com.See more articles by Marc here.