Thursday, August 25, 2011

stock market investment tips lessons from stock market turmoil

stock market investment tips lessons from stock market turmoil ; The stock market has had people gasping lately, seemingly losing or gaining roughly 5 percent every day. It would be folly to assume the worst is over, because most market observers agree that the one thing they can expect from this market - even as they argue over its future direction - is volatility.



But as most investors are catching their breath, it makes sense to look at five lessons they might have learned about the market - had they been able to focus amid the chaos.



1. There is still a case for owning stocks.



Investing legend Jack Bogle, in an interview with Morningstar Inc., said the odds are that stocks will have a better return than bonds over the next decade. Here's how Bogle, the founder of the Vanguard Group, figures it:



The 10-year Treasury is yielding roughly 2.3 percent, so its return will be between 2 percent and 3 percent over the next decade. Stocks also have an average yield of 2.3 percent, "but they have earnings that should grow even if the economy grows a little more slowly than say at 4 percent instead of 5 percent. In nominal terms, that would be a 6 percent return on stocks. Maybe they can grow a little faster."



2. Cash begets calm.



Somewhere between being fully invested or completely on the sidelines, a big slug of cash is a powerful asset in turbulent times.



For someone nervous about the money they have in the market, having sufficient cash to ride out the bumps and not believing they must sell something to protect themselves is smart. And for someone worried about being out of the market if and when there's a rebound, having cash allows them to pursue the "buying opportunities" that come up when the market is down.



"When you have a big-enough cash cushion, you can feel like you have more control, which is good at a time when the market seems so out-of-control," said Richard Geist, president of the Institute on the Psychology of Investing.



3. We bemoan loss more than we celebrate gains.



A 500-point decline in the market has investors ready to pull their hair out and fearing for their financial future, but a 500- point gain doesn't have the same person contemplating an early retirement. It's the same percentage move, but investors feel perceived losses more acutely than gains.



Knowing that, individuals need to guard against knee-jerk reactions to downward markets, because there surely are more bad trading days ahead.



4. Leveraged and inverse ETFs are not to blame for the market's volatility.



The supposition here is that with exchange-traded funds representing such a big part of the total trading these days, the leveraged funds are kicking volatility into high gear for everyone. It makes for nice chatter, but it doesn't appear to be true.



According to Morningstar, leveraged and inverse ETFs represent just 5 percent of total assets held in ETFs. Moreover, during the 10 trading days ended Aug. 12, those ETFs represented just 13 percent of the dollar volume being traded in ETFs.



5. The market is full of surprises - and opportunities to be wrong about "what's next."



When Standard & Poor's downgraded the U.S. credit rating, the general consensus was that demand for Treasury bonds would fall. Instead, it rose. When consumer confidence reached its lowest levels since 1980, the assumption was that the stock market would tank. It rose.



In fact, every time the market appeared headed for a deeper hole lately, it rallied, and every time it appeared the rally was strengthening, it faltered.



So although it is tempting to make moves while trying to anticipate where the market will go in the next day, week or month, it's typically going to be more profitable to stay focused on how to generate returns over the next decade and beyond.



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