Better Business Basics
Better Business Basics
For the better part of the 1990s, the booming stock market made the average investor look like a guru. Double-digit returns were assumed and triple digit returns seemed possible. Until the country recovers,
try conservative investmentsIn 2000, the market began a steady downward spiral and carefree investors learned the hard way that the best investment strategy is not simply to buy shares in high tech companies
Just when the consensus on Wall Street was that the economy was nearly ready to turn the corner and get back on the road to recovery, the horrific terrorist attacks occurred.
In the wake of the tragic events of Sept. 11, the market has experienced even greater volatility and a further lowering of stock prices. Several industries, such as airlines, hotels, restaurants, tourism, retail and insurance have been hit very hard.
So how should you invest given our unprecedented situation?
If you have many working years ahead of you and your employment is very stable, I recommend investing the way you always should have been investing. That is, you should use a strategy known as dollar-cost-averaging, which basically means that you invest the same amount of money at the same time each month no matter what happens in the market. This strategy is based on the well-researched finding that the average investor -- not to mention the average broker -- is completely unable to identify high and low points in the market.
In short, if you were investing in the market before, you should continue to do so now.
If you are nearing retirement and/or your employment status has recently become unstable, you need to be much more conservative.
My retired grandmother just sold her home and asked me what she should do with the money. Her plan is to use the proceeds from the sale of her home to live off for the rest of her life.
Because we may not have seen the last of terrorism on our home soil in the immediate future and because we are at war, my recommendation to someone in her situation is to be as safe as possible.
Specifically, I recommend she avoid investing in the stock market right now. Government bonds, high-grade corporate bonds or even a bank certificate of deposit would keep her money safe from the volatile times that likely lie ahead.
I know this advice will result in a lower expected return than investors have become accustomed, but a retired person can not afford to lose their nest egg that has taken so many years to accumulate.
This conservative approach to investing should be adopted until the nation has recovered from its understandable hesitancy to fly, we are no longer at war, and we have gone several quarters without a subsequent terrorist attack.
Mike Seiler is an associate professor of finance at Hawaii Pacific University. He can be reached at mseiler@hpu.edu.