Things to Consider When Deciding to Invest Again
As 2009 draws to a close, however, reports of a likely economic rejuvenation in 2010 continue to grow, and that's good news for families who have stuck it out through tough times many never saw coming. But before diving back into the investment game, families should consider the following tips to help make the most of their money in an economy that's not necessarily guaranteed to recover.
* Keep cash on hand. For many people, the economic downturn that began in late 2008 and extended well into 2009 was a complete surprise. When caught off guard, be it by an unexpected layoff or a rapidly shrinking investment portfolio, a lot of investors and families realized they simply did not have enough cash available. Now that many families and individuals are ready to return to investing, it's important to ensure there's plenty of cash set aside for emergencies. This emergency fund should not be invested or used for daily expenses. Routinely contribute to this emergency fund as well, even if it's only in small increments.
* Invest small. If the recession of the last year proved anything, it's that there are no guarantees when it comes to investing. Many of the nation's banks went under, and many people lost their life's savings. So when you've made the decision to return to investing, do so in small increments. Even so-called "sure things" should be measured with a grain of salt. A good rule of thumb to consider while the economy is rebounding is to ask yourself how much you'd normally invest when the economy is healthy, and then invest a much smaller percentage, such as one-third or one-fourth, of that amount.
* Put all your eggs in different baskets. Where many people got hurt during the market's crash over the last 12 months was to ignore one of the fundamental rules of investments: diversification. A business' success is contingent on so many external circumstances that it's never a good idea to put significant faith in any one business or stock. Spread your investments around to several stocks to safeguard your assets. Even if one stock is booming, avoid the temptation to sink most or all of your investment dollars into it.
* Decide on a stop-loss. A stop-loss is a pre-determined price at which an investor decides to sell a stock should it begin to lose value. The goal of a stop-loss is the minimize the loss an investor takes on a stock that does not perform as well as initially hoped. In a healthy economy, a stock will likely rebound. However, as the recession of 2008-09 proved, in a poor economy no such likelihood exists. For instance, stocks such as Lehman Brothers and Fannie Mae hit zero during the recession. Waiting out a rebound in a poor economy is not necessarily a strong strategy, as there is no guarantee a poor economy, and subsequently a poor stock, will rebound. Decide on a stop-loss for each stock and stick to it.