Expert: Paul Henneman - 5/31/2007

Question
If one has a substantial amount of new money to invest at this time, would you put it in mutual stock funds...or what? The last time the market was at a very high point it immediately turned when we entered and it has taken years to recover just the dollars initially invested.  

Answer
John,
   Thank you for your question!
   Unfortunately there is no clear answer to this question. Every investor is different, has different goals, and is willing to take on different amount of risk.
   You are right to be concerned that the markets have performed so well, this never lasts forever. However, it is far more difficult to determine when the markets will stop their upward movement. Perhaps next week, perhaps it will be many more months.  But perhaps I can offer some general guidelines that would help.
   It sounds like from your email you would perhaps prefer to go on the side of caution. If I am wrong about that, please do not hesitate to follow up with me and we can discuss more agressive options.
   Even with a cautious outlook, it would be a mistake not to invest at all. There are more conservative investments. For example, you can currently get about a 5% return on a Certificate of Deposit (CD), with no risk. That is not a great return, but there is no risk to it.
   Carefully chosen mutual funds will also help spread out your risk. For example, there are what is called index funds that track specific market indexes. The S&P500 is perhaps the most stable market index, for example Vanguard has its S&P500 index fund with the ticker symbol VFINX.   This means that the fund will always perform nearly exactly the overall market index, no better and no worse.
  There are other good mutual funds out there, but be careful. What many investors found out in 2000 was that even if they held several mutual funds, these funds all held very similar stock portfolios so they were not really diversified very well. The term for this is correlation, so many mutual funds are highly correlated.  If you select mutual funds carefully by seeking out those that perhaps specialize in different areas of the market, it will spread out your risk.
   You should also consider carefully how long of a time period it will be until you need to use your investments. If you plan to use the funds in less than 10 years, then you should be most concerned with 'wealth preservation' rather than growth, and be very conservative. If you have a longer time horizon of several decades or more, than you can take more risk because even if the markets do poorly for a few years, there is plenty of time to recover.  Overall, given enough time, an investment portfolio with higher risk will result in substantially greater wealth.
  Ultimately the answer is to have several different types of investments. Some index mutual funds, carefully chosen specialty funds, and very safe investments such as CD's. You can weight certain categories more or less if you want, or simply go with two thirds in mutual funds and a third in CD's as a general guideline.
  Ultimately a stock portfolio will add even more diversity, and be able to offer greater returns. It is difficult for individual investors to spend enough time on their investments to accomplish this, but there are ways to create a stock portfolio that will perform quite well even in down markets. For example, if you are interested, I invite you to take a look at www.ValuEngine.com, my company's website. Click on the 'newsletter' tab at the top, and see what our 15 stock portfolio has done. Or, click on the 'Stock Analysis' tab and then 'ValuEngine Portfolios' to view several other portfolio stratgies. These portfolios were positive in 2000, 2001 and 2002. It takes a large research effort to put this type of performance together, but it is out there.
     To summarize, diversity is the key. Everyone needs to have their money work for them, to keep it in cash accomplishes nothing. But, you are correct ot be cautious with the major indexes hitting all time highs repeatedly. Diversify!

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