Focus On Your Own Goals, Not The Bulls And Bears

If you've been obsessing over whether to plunge into the long-standing bull market, the Dow's precipitous Mar. 8 drop might have made you glad you waited to buy. Then again, it might have enhanced your paralysis by making you fearful of even further declines. Either way, you'd be wrong: If you're making a decision about investing in stocks, you need to disregard the market level on any given day and focus on your longer-range financial goals.

Granted, that's a tough suggestion to follow. With the Standard & Poor's 500-stock index up nearly 38% in 1995 and the market's rampant volatility this year, it's no wonder many people are hesitant about dumping money into stocks. However, "investing should never be a function of how high or low the market is," says Larry Elkin, an accountant and financial planner in Hastings-on-Hudson, N.Y. Experts agree that despite market behavior, it's important to be disciplined about investing.

Why? Because it's impossible to time the market's ups and downs. Consider this: If you invested $1 in the S&P in 1926, you would have earned $1,114 by yearend 1995 (intermediate-term government bonds would have returned $36). But if you subtract the best 35 months during those 69 years, your investment would only be worth $10.16, according to Ibbotson Associates, a consulting firm. "Blink, and the best time to invest in the market is gone," says Robert Phillips, an Indianapolis money manager.

That's why, if you have money destined for the stock market, many financial advisers would recommend simply dropping it in now. "There is no benefit to dollar cost averaging vs. investing in a lump sum," argues Ibbotson consultant Derek Sasveld. Others would say, however, that spreading out your investment payments over a period of time is useful as a psychological motivator for a reluctant investor or as a direct deposit from a monthly paycheck.

This assumes you already have a portfolio in place. If you don't, then consider your long-term financial goals and the returns you need to achieve them. Would you like the money in six years, to send a child to college, or in 12 years, to live off of when you retire? With these questions answered, figure out your risk tolerance. "How much of a drop in the market can you accept before you panic and sell?" asks New York financial planner Robert Clarfeld.

GAIN AND PAIN. To determine your pain threshold, it helps to know what your chances are of losing money if the market plummets. For stocks invested in the S&P for one year, you have a 27% chance of losing money. That drops to 10% when you stay invested for five years and 4% with a 10-year time period. After 12 years, your chances of suffering a loss falls to zero, says Ibbotson. You should be able to ride out a crash. In all but 2 of the 12 bear markets since 1948, the market more than made up for its loss in the first year following a bottom.

Armed with historical data, personal goals and risk tolerance, it's time to devise an asset-allocation plan. Naturally, everyone's portfolio will be different, but there is one basic tenet: diversification. It can increase return while minimizing risk. There's more risk in 100% bonds than 80% bonds and 20% stocks.

Perhaps the most efficient and cost-effective way to play the market is through an index fund. These funds buy stocks to mirror an index instead of trading securities as an actively managed portfolio does. Rather than beat the market, index funds try to replicate it. They make sense when you consider that only 16% of the diversified equity funds beat the S&P last year, according to Morningstar, the fund-research firm. What's more, "index funds add value because they have lower expenses," says Chicago financial planner Mark Bell. The Vanguard S&P 500 index fund has an expense ratio of 0.19%, compared with 1.3% for all large-cap stock funds.

HAPPY UNION. For investors who want to take a chance with stock picking, Marshall Acuff, Smith Barney's portfolio strategist, sees some opportunity in technology stocks, specifically, companies with well-established products and services that support the convergence of the cable and telephone industries. He doesn't think it's time to move entirely into cyclical stocks as a play on an improving economy. "I think a blend of growth and cyclical stocks are a good bet," says Acuff. Utilities should be avoided, he suggests, because of slow growth in that sector.

Remember, if you know your objectives and are comfortable with the downside risk, then when to invest shouldn't be a question in your mind.