Making the most of your stock and stock mutual fund investments

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Here are suggestions for making the most of your stock and stock mutual fund investments in the worst economic environment since the Great Depression.

Patience and Discipline

Successful stock investing requires patience and discipline, and the next couple of years will test these attributes sorely. After

enduring big drops in stock prices across the board, the temptation to cash out is overwhelming at times. The idea of buying stocks in such a market makes you wonder if you’ve lost your mind. Patience and discipline are also important attributes for your investment advisor. You should expect no less.

Establish a Stock Investing Plan and Stick to It

When the stock market is volatile and trending downward, it’s natural to think that it’s too late to do anything, so just let the investment gods take over. That’s not a plan. Rather, a plan should look out five or ten years, a period of time that includes a stock market recovery. While your plan may be to ride out the storm with the investments you already own, that’s okay as long as you think it through. Once you or your advisor makes a plan, don’t abandon it. While you might want to make some sensible midcourse adjustments, they should not deviate significantly from your plan. Consistency pays.

Shun Those Who Think They Can Predict the Future of the Stock Market

There will always be people who think they can predict the future of the investment markets. Those who do either have an agenda (they want to sell you something or promote their firm) or, more likely, they are delusional and should therefore be shunned. It’s impossible to predict with complete accuracy how the investment markets will fare, particularly over the near future. But just as bad as following the fantastical and fallacious forecast of a single person is following the crowd. It was the crowd mentality that bid up the dot.com stocks back

in the late 1990s and caused investors to overdose on stocks during the 2003–2007 bull market. Here is a technique that will almost certainly keep you out of trouble: do the opposite of what the crowd is doing. In other words, lighten up on stocks when the mob is euphoric and buy when it’s morose. This is very, very difficult to do at any time, particularly when the market is in free fall, but you’ll probably be better off financially if you can muster the courage to do so.

Here’s a case in point: Warren Buffett, arguably the greatest investor on the planet, started buying stocks in early 2008, when the stock market began to weaken. Then the market plummeted, and some supposed experts said that Buffett had lost his touch. But he kept adding to his holdings as the stock market was sinking. Here’s a question. Five years from now, who do you think will be correct? The pundits who said that Buffett had lost his touch or Buffett?

Size Does Matter

Stocks are often classified according to the size of the company as measured by the total value of its stock: large company, midsized company, and small company. Large-company stocks have been holding up better than small-company stocks amidst the sharp decline in stock prices. But over the long term, small- and midsized-company stocks usually outperform, so every welldiversified portfolio should include stocks in all three categories.

If you like to own shares of individual companies, stick with large companies. It’s too risky to buy individual shares of smaller and midsized companies, so the smartest way to own them is through so-called small-cap and mid-cap mutual funds or exchangetraded funds.

Go Global

There is a lot more to stock investing than buying U.S. stocks. In fact, U.S. stocks histori cally have not performed as well as foreign stocks, although that has not been the case recently, as foreign economies are suffering even more than the United States amidst the global economic crisis. But that doesn’t make foreign stocks any less attractive. The only feasible way to play the foreign markets is to buy a good international mutual fund. Avoid singlecountry funds or single-region funds. Look for garden variety international funds that scour the world for the best investment opportunities in countries with advanced economies and thriving stock markets. To round out your international holdings, also consider owning an “emerging markets” mutual fund that invests in rapidly growing developing countries like China and India.

Buy and Hold No Longer Works

The days when you could buy some stocks and stock funds and hold onto them indefinitely are gone. Actually, those days are long gone. Since the beginning of this decade, you could no longer rely on a previously reliable investment serving you well indefinitely. The ups and downs of the stock market are at alltime highs, and this can affect even the bluest of blue chip stocks and the most consistent mutual fund. You or your investment advisor needs to review your individual stock holdings regularly.

Consider weeding out any companies with poor prospects in this difficult economy. Plenty of companies have poor prospects. Also review your mutual funds. Some of the all-time best mutual funds stumbled horribly during the recent stock market crash. If you have a mutual fund whose performance is deteriorating compared with the average for its peer group (for example, your

small-cap fund is badly underperforming the average small-cap fund), replace it with a better performer.