Expert: Paul Henneman - 11/20/2008

Question
I have been working for about 2 years now and have saved a good amount of money.  I invest in my company's 401k but recently have earned enough money to start other investments.  I opened a Vanguard Total Market Index Fund and have been building that up.  My question is whether you think index funds are still the best idea for a new investor, or if I should be looking for individual proven stocks to take advantage of in this downturn, like Microsoft or Exxon.  Or maybe I should just diversify my index funds into global, healthcare, energy, etc.

Secondly, though I expect the DOW will get back up to 14,000 levels, is there any limit to how high it will go?  To get the same percentage growth of the past 30 years (~800 to ~ 8000) over the next 30 years, it would have to grow to enormous levels, like 80,000 (~8000 to ~80,000)... or maybe I'm thinking about this the wrong way. Thanks.

Answer
Jason,
    Thank you for your question!
Yes, in general index funds are a great way to go, unless you are willing to spend quite a bit of time researching individual stocks. You are right that there are incredible bargains out there now. But, it is still very possible that they could drop quite a bit more in stock price. If your time horizon is long enough and a drop in stock price now won't bother you, then putting a small portion of your investments into several stocks may be worthwhile. If you do this, select several stocks, not just one. It will limit your exposure in the event that some of your picks have negative performance.
      There is no limit to how high the Dow will go. Decades ago it was unbelievable to most that the dow would ever trade at 10,000. Many analysts and experts do expect the rate of growth to slow, and even pull back to flat or negative for several years to come. But, in the long run, the economy will grow and with it will the stock market.  There are analysts out there already trying to predict when the dow will hit 100,000.
    Your thinking about your investments is fine, congratulations on having the discipline to see what is happening now as a buying opportunity. Your contributions to the 401k is excellent, due to the tax advantages. Your current investments into an index fund are good, that sort of investment requires little time and research on your part, and will grow over time. Add to it a small amount of investment in several individual stocks, and you have a complete financial plan.  Perhaps add some savings to risk free CD's (certificate of deposits), and you will be well diversified.

I hope this helps, please do not hesitate to follow up with me if I can be of any additional service,

Best Regards,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com