Will beginners rush in where veterans refuse to tread?
The exodus from financial markets by many weary investors who have lost both courage and money is understandable. They need a timeout.
Continued market volatility, however, also has a chilling effect on those who otherwise would be considering investment for the first time. It just doesn't seem worth the effort right now.
Experts say a worrisome period such as the current one is actually the best time to invest because the downside is more limited. "Buy low and sell high" becomes more likely when starting from a lower point, they believe.
"A beginning investor can have some degree of confidence that we won't see this dramatic a drop in stocks again anytime soon," says Bonnie Ashby Hughes, certified financial planner and president of American Capital Planning LLC, in Reston, Va. "We've been through an ugly period, and we're hopefully at the tail end of it."
She notes that Hewlett-Packard Co. (HPQ) is a stock that's been hard-hit from a scandal and management change, but still represents a good company with a lot of cash whose stock price is going to come back. That makes it a good opportunity in her opinion.
It's not a bad idea to put a small portion of your beginning investment in individual stocks so you can understand that market better, she says, but the bulk of your money should go into funds.
Despite the economic and market difficulties of the past couple of years, the average U.S. diversified stock mutual fund and the average world stock fund have managed to gain 9 percent this year, according to Lipper Inc. That's certainly promising.
"Unless you believe the world is ending and there is no progress ahead, this is a fabulous time to be a beginning investor," says Marilyn Capelli Dimitroff, certified financial planner and president of Capelli Financial Services Inc., of Bloomfield Hills, Mich. "It is depressing but true that stocks are back to where they were in 1999, yet retreat like that is the perfect time to buyespecially for someone with a long-term time horizon."
The stock market ultimately will be higher, she believes, which is what beginning investors should keep in mind. Build a diversified base that can be expanded upon. She'd start with exchange-traded funds such as SPDR S&P 500 (SPY) in domestic stocks and iShares MSCI EAFE Index (EFA) in international stocks. Exchange-traded funds are traded on exchanges like stocks.
"If beginning investors wait for the turmoil to end, they will never invest," says Paul Merriman, editor and publisher of www.fundadvice.com, in Seattle. "The sooner they start the better off they are likely to be."
A newbie should celebrate market declines because they can initiate their investing when the great asset classes are low in price, Merriman says. The best road to success is to begin a diversified portfolio as soon as possible with an ETF investment such as Vanguard Total World Stock ETF (VT), he says.
Construction of a personal portfolio shouldn't dwell on just a few stocks, but spread risks through several asset classes, Merriman says.
His model portfolios include funds that are good building blocks toward a larger portfolio as your investment capacity grows.
Beginning investors shouldn't jump into the market all at once, watch their investments fluctuate a bit, and pull everything out in a panic at the absolute wrong time. That too often is the case.
For a moderate investor, Merriman recommends the following model ETF portfolio to be built up gradually:
In stocks, Schwab U.S. Large Cap (SCHX), Vanguard Value (VTV), Schwab U.S. Small Cap ETF (SCHA), and Vanguard Small Cap Value (VBR).
In real estate investment trusts, Vanguard REIT Index ETF (VNQ).
In international stocks, Schwab International Equity (SCHF), Vanguard FTSE All-World ex-U.S. Small Cap Index (VSS), WisdomTree International SmallCap Dividend Fund (DLS), and Schwab Emerging Markets Equity ETF (SCHE) and iShares S&P World ex-US Property Index (WPS).
In bonds, iShares Barclays 1-3 yr Treasury Bond (SHY), iShares Barclays 3-7 yr Treasury (IEI), and iShares Barclays TIPS (TIP).
"People starting out in investing typically go wrong by thinking of stocks as only the total market and the Standard & Poor's 500, but that just involves large-cap growth stocks," says Merriman.
"Yes, you should have that, but you should also have large-cap value, large-cap growth-and-value, small-cap value, and a slice of REITs."
A portion of your holdings should be outside the U.S., as well as in U.S. companies doing extensive business in the world's emerging markets, he adds.
His strategy for stock mutual funds is similar, employing the low-cost Vanguard Group as a typical model portfolio:
In domestic stocks, Vanguard 500 Index Investor Fund (VFINX), Vanguard Value Index (VIVAX), Vanguard Small Cap Index (NAESX), and Vanguard Small Cap Value Index (VISVX).
In international stocks, Vanguard Developed Markets Index (VDMIX), Vanguard International Value (VTRIX), Vanguard FTSE All-World ex-U.S. Small Cap Index (VFSVX), and Vanguard Emerging Markets Stock Index (VEIEX).
"For someone starting out in investing, especially a younger person, the impact of beginning now and investing as much as you can, can be powerful," says Dimitroff.
"If you can avoid getting spooked by dips, you'll find compounding can make a dramatic difference."
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