Investment Tips: Weathering the Financial Crisis

Washington Post has a good discussion section where you can find enlightening discussions on various topics and read helpful advices from experts. I found an interesting business discussion in which Tim Hanson of The Motley Fool answered investment questions dealing with the financial crisis. Some of the key points are as follows:

1. The stock market is a crazy and irrational place that fluctuates violently according to news and rumors. However, in the long term, stocks are much more predictable. If you focus on diversification, smart allocation, and companies with strong brands, balance sheets, and good management teams, you can be a successful long-term investor. Good companies will attain to their intrinsic/fundamental values over the long term.



2. In times of financial instability, do some asset reallocation. Move your funds from small cap funds to large cap funds or bonds.



3. If you are relatively young, it's okay to invest more in stocks. But if you are nearing retirement, invest in high cap stocks or bonds.
   
   
   If you're more than 10 years from retirement, you want to be 80% to 90% in stocks. If you're 3 to 10 years from retirement, you want to be 60% to 70% in stocks. And if you're nearing or in retirement, you want to be about 50% in stocks and 50% in principal-protecting bonds and treasuries.



4. When the market crash causes every stock value to plummet, it creates opportunities for long-term investors to buy normally high stocks at a bargain and diversify their portfolio. Also diversify your investment outside the US. Foreign stocks in China, Brazil, India, Europe and the like provide good value/growth opportunities.



5. Use dollar-cost averaging technique for investments such as Roth IRA. You can get more bang for your buck as the market drops. Make sure you invest in chunks that are big enough to keep transaction costs to less than 1% or 2% of your investment.



6. Generally speaking, if you own an index fund, that's going to be so broadly diversified that owners have no reason to panic. They're generally low-cost, broadly diversified, and offer returns that most well-paid active mutual fund managers can't beat.

Check out the full read: The Financial Crisis And You: Impact on Your Investments