Easing into a tricky stock market
Ready to give the stock market a try?
Rallies like the sharp upturn the market has had since March 9 tend to give reluctant people the urge to invest in stocks again. But if you are among them, remember there is no clarity yet that this rally is for keeps.
Often in bear markets, or long-term losing periods like the one stocks have been in since October 2007, there are rallies that look good for a while, only to be replaced by downturns.
So the safest approach is to add a little money to stock mutual funds with each paycheck through a 401(k)-type retirement plan. That way you don’t bet a large sum at a single point. And mutual funds provide more safety than making a bet on individual stocks.
Three other approaches that could work, depending on your level of bravery:
The fast-escape method: If you want to put some money into stocks all at once, exchange-traded funds, or ETFs, are an easy option to obtain broad exposure to the market. They are like mutual funds, but you can sell them on a moment’s notice if you have second thoughts. That’s different from a regular mutual fund, which you can buy or sell only at the close of each business day -- which can seem endless when stocks are plunging.
Academic research suggests that running in and out of the market is a loser’s game because even the savviest investors don’t know when to jump in and out. So the fast-escape method isn’t necessarily smart. But sometimes the thought of being able to make a quick exit gives people the courage to stay invested.
If you are among them and want an exchange-traded fund that will give you exposure to 500 of the market’s largest stocks -- companies including Wal-Mart Stores Inc., Johnson & Johnson, Exxon Mobil Corp. and Google Inc. -- try a fund called the SPDR Trust. You can identify it with the ticker symbol SPY when you go to a broker. The fund invests in companies in the Standard & Poor’s 500 index.
Another similar choice would be the Vanguard Dividend Appreciation ETF, identified by the ticker VIG. It picks companies that are expected to pay dividends. Collecting dividends can be a way to earn a small return -- or reduce your losses -- while the stock market disappoints investors.
To buy or sell ETFs, you will need a brokerage account or perhaps an individual retirement account.
Search discount brokers on the Internet and ask them to show you how you would buy or sell an ETF online. They tend to have lower fees than mutual funds, but you also pay a commission every time you buy or sell.
That’s why it’s not appropriate for frequent investing, such as monthly deposits.
The Golden Oldies: If you like the idea of having a smart fund manager picking stocks for you, you could toss some money into a fund that has had a good long-term record -- funds such as Sequoia, Third Avenue Value, Dodge and Cox Stock or Longleaf Partners.
Over the last few months, investors have fled these and other less-renowned funds because managers have suffered deep losses.
The Sequoia fund, for example, did better than most but fell 27% last year. That’s horrible for an investor, yet in the fund industry it’s considered a win because the loss is not as severe as the drop in the S&P; 500. The SPY exchange-traded fund fell 36.8% last year.
Research by Morningstar Inc. suggests that index funds tend to do better over time because they charge less in fees compared with funds that employ managers to try to pick winners among stocks.
But some Golden Oldies have been standouts, earning their keep despite higher fees.
Over the last 10 years, the Sequoia fund has averaged a 0.74% return annually, according to Morningstar. That’s not much to get excited about. But the S&P; 500 did worse, with the index fund suffering an annualized loss of 3.43%.
The cautious approach: Investors who want to dip a toe into the stock market but aren’t sure they want to dive right in can hedge with a so-called balanced fund, which puts about half of your money in stocks and about half in bonds.
By combining stocks and bonds, balanced funds typically don’t decline as much as the overall stock market. The Vanguard Balanced Index Fund, for example, lost 22% last year.
But some respected balanced funds, such as Dodge and Cox Balanced, stumbled badly in the treacherous market as both stocks and corporate bonds were snared by losses in the credit crisis. The fund declined 33.6% last year.
Some balanced funds to consider: Janus Balanced, Oakmark Equity & Income, Vanguard Wellington and FPA Crescent.
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