THE COLOR OF MONEY
Weigh factors before diving back into stocks
By Michelle Singletary
WASHINGTON — Soon we may have to pay the banks to hold on to our money. Currently my bank is paying me 0.25 percent on my savings.
"We might as well put the money under our mattress," my husband said. He was kidding, of course. But the comment made me realize why I'm not abandoning stocks (or in my case, equity funds — mutual funds that invest in stocks).
If you let history and the current interest rates paid for deposit accounts be your financial guide, investing in the stock market is still worth the effort. And I'm not the only one who thinks so.
As noted by Susan Wyderko, director of investor education for the Securities and Exchange Commission, the most recent published reports show investors returned to mutual funds in the last quarter, pouring in more than $34 billion and reversing months of decline.
"In recent weeks, the markets have had double-digit gains not seen since the go-go '90s, before the bubble burst," Wyderko said.
But is Wall Street really safe for Main Street investors now, Wyderko wonders.
It can be, if they're careful.
"Investors that got burned the worst in the stock market meltdown were often the ones whose portfolios weren't sufficiently diversified," Wyderko said. "In other words, they had too many eggs in too few baskets."
That could mean all stocks and no bonds. Or having most of their money in one stock or sector. Or believing ridiculous promises of sky-high returns with little or no risk.
Wyderko is afraid investors might forget the lessons learned from the recent bear market. I think she's right.
If you want to invest wisely, here are some of her suggestions:
Know where you stand. For goodness' sake, please open up your financial statements. You have to begin tracking how your stocks or mutual funds are doing. Not knowing isn't going to make a bad investment go away. If you have questions about the information presented, Wyderko advises, ask your broker or financial planner, or call your mutual fund company's customer relations number.
Figure out why you're investing in the first place. If you've got 10, 15 or 20 years until you'll need the money, you may be able to take more risks. But if you need the money in a few years for a down payment on a home or car, the stock market is no place to invest amounts you need in the short term (five years or less). When you invest, you risk losing some or all of your money. Don't do it if you can't afford the loss.
Make sure you have enough for everyday expenses. On a radio program recently, a caller asked me what he should do with a $3,000 windfall, where to invest it. My first question was: "Do you have any credit card debt?" There was silence and then a sheepish yes. "What's the interest rate?" "High," the man said. What he — and you too if in a similar situation — should do is invest in paying off that credit card debt.
For heaven's sake, diversify. Wyderko and anyone with common sense has been trying to beat this into investors' heads. Many listen; many don't. "There is no better way, over the long term, to distribute risk than to diversify your investments," the SEC points out on its Web site. "It is true that in some years, a single stock or an individual sector will outperform a diversified investment strategy, at least for a short time. But don't forget that investors who are shooting for fantastic returns by investing in a single stock or one sector have also assumed the higher risks of a more narrow investing strategy."
Pay attention to fees. The costs of investing really matter, especially now that returns are much lower than in the recent past. Wyderko points out that a 1 percent annual fee on an investment held for 20 years will reduce the ending account balance by 18 percent.
The SEC's Web site (www.sec.gov) has a calculator that lets you check out the cost of a mutual fund. Under Investor Information, click on Interactive Tools. The Mutual Fund Cost Calculator lets you plug in numbers from mutual fund prospectuses and compare the costs of owning particular funds.
If the puny savings rates have you rethinking stocks, at least be smart. Learn a little before investing.
Michelle Singletary writes for The Washington Post.
