Investing Like a Pro for Beginners

Managing Your Money in Tight Times

by Anne Pyburn , September 28, 2010

Hedge fund managers complaining to President Obama that they feel like papier-mâché dummies being hung up and beaten at a party, to which the rest of us never got invited. Billionaire brothers with Daddy issues convincing a whole bunch of regular people that big business is their best friend, and that if we just stop trying to accomplish anything at all through public collaboration, everything will be all better. A constant onslaught of pundits’ pronouncements on the Dow, the deficit, how various industries are faring and what that indicates. The recession may have been officially declared over, but it certainly cannot be said that all is calm throughout the world of finance, and it seems unlikely to be for some time.

That doesn’t mean, however, that the best place for your money is buried under your favorite tree. Barring a complete apocalypse, there are still some basic, sound principles that can help you venture into that world and be better off for it in the long run. According to Beth Jones of Third Eye Associates, it’s about following time-tested wisdom and avoiding the trendy notions that can lead straight off a financial cliff.

“Short term money that you might need within three to five years, you should keep in CDs or the bank, not in the stock market. It’s not the place for short term gain right now,” she says. “There’s still an awful lot of nervousness in the market. We have a pretty good indication that the worst is over, but every time a little news comes out, people react—the market will continue to be volatile mainly because of emotion. Everyone gets afraid that a stock will go down so they sell, which of course then makes it go down. We’d all be better off if we take the emotion out of the picture, and let money do its thing.”

That thing it still does, over the long term, is grow, and Jones says that diligence and patience can still yield results that will afford you a comfortable old age. “For starters, don’t spend more than you make, and save 20 percent or more a year toward your retirement. That’s the long term money, and you should have it properly diversified among stocks and bonds. Mutual funds are usually best, because people can’t afford to diversify sufficiently on their own. If you own five stocks and two vaporize, you’re SOL.”

Motley Fool writer Dan Caplinger concurs with Jones about avoiding panicky overreactions. “It's always scary when a stock you own drops a lot. But selling after such drops often proves to be a terrible mistake when the stocks inevitably recover,” he writes. Jones is not a fan of index funds in times like these. “Indexing does not work in a volatile market. For example, take Standard and Poor’s. The top 30 companies comprise a huge amount of the market, but with an indexed fund, nobody’s minding the store. You’re not truly diversified. The best way to go is good quality, active management that can anticipate and analyze, and allocate tactically—that outperforms indexing in a volatile market. And while I do believe we’ll see a return to stable markets and single-digit, steady returns, there are likely to be several more years of volatility first.”