Departments: Money
Have I Missed the Boat? and Other Stock Market Concerns

Q: Should I jump in?

A: That's the question I got recently from a new investor. He wanted to know whether I thought it was too late for him to get into the stock market. He said that while he was doing his research, the market skyrocketed. "I'm really frightened to pull the trigger and jump in," he said. "I get the feeling that I missed the boat."

It's never too late to get into the stock market. The stock market will likely be going up and down and up and down for decades. But it always moves in a generally higher direction if you're willing to ride out those bumps.

Yet I'm concerned about this particular investor jumping into the market, chiefly because of the way his question is worded. He says that he's really frightened to pull the trigger and that he gets the feeling he's missed the boat. That's a very dangerous way to feel as an investor, dangerous because it might mean you don't have the staying power necessary to succeed.

Regret plays a powerful role in investment decisions. Lots of studies have been done on regret. We know, for instance, how people regret near misses.

Meir Statman, a professor at Santa Clara University, talks about a case where two travelers miss their planes, one by a matter of minutes, one by an hour. The traveler who misses his plane by minutes is far more miserable, even though their situation is exactly the same: They're both stuck in the airport terminal.

Studies also show that people regret losing money more than they regret missing an opportunity. That often means they decide not to take a risk and not to invest in stocks.

As investors, we have to recognize regret for what it is and put it aside. No looking over your shoulder and second guessing your decisions.

The goal of a beginning investor should be to get a good return and learn how to deal with the market's volatility. The other choice is to put your money in the bank.

There is a second important decision for a skittish new investor to make, though, and that is to decide whether to dump in a lump sum or move in gradually using a strategy called dollar-cost averaging, which means investing regular amounts of money in a stock or mutual fund every month or every quarter.

Lots of studies have been done on dollar-cost averaging v. lump sum investing. To sum them up, they show that because the market goes up more than it goes down, investors who dump in the lump sum get invested earlier and they do better over time.

Q: What's the best financial resolution to make for the new year?

A: Resolve that you will make peace with your money, that you will figure out how to be comfortable with it. That means setting priorities to accomplish your most important goals, giving what you can, and enjoying what you spend on yourself, too.

I moderate an online newsgroup where I see hundreds of questions every month. Some who write in don't believe they make enough or they think someone else makes too much or they want their spouse to stop dribbling away so much of it.

I sense that lots of people do battle every day with their money. It's not because they don't have enough money. It's because they don't know what they want their money to buy. Sometimes it's because they're consumed by regret that they didn't make different financial choices.

Clearing all this away and coming to terms with what we have and at the same time always reaching for what more we can learn and achieve and contribute is a good life's work.

Q: Is an index stock fund the safest investment?

A: I see this question frequently. The answer is no.

I suppose people have picked up that idea, because there's been so much talk over recent years about the advantages of index funds.

An index fund contains a mix of securities that mimics a market index such as the Standard & Poor's Index of 500 Stocks. Because it holds securities in the same relative weightings as the index and trades infrequently, expenses are low. In a good index fund, returns parallel the market. They work well for beginners, because there is no portfolio manager to monitor.

But they have disadvantages, too. Most index funds invest in stocks, and there are no guarantees. When the stock market goes down, the fund goes down. "Safe" is not a word I would choose. Perhaps "practical" or "efficient."

--Mary Rowland

Rowland is an author and contributor to several financial planning magazines.

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