how to invest in uncertain times

I’ve been following the market for some time now and if you have also, you may have realized how crazy up and down the market has been over the past few months. There are many reasons why the market is shifting up and down with a lot of forces pulling it in either direction. The fed’s worry about the inflation risk pushes them to hold interests rates up which limits the amount of money that circulates in the general market which keeps inflation down. This lowers the price of the market in general because there’s less money to invest and higher interest rates means higher return on bonds and savings. When the fed reduces the interest rates, it pushes markets higher because there is more borrowing power to invest.

It seems that even great companies get pushed around by the general direction of the market. So what do people like you and me do when times like this makes you worry that you’re going to buy in at a peak? The answer is…don’t be afraid to buy into the market. The market is cyclical and you may be buying at a peak in a cycle, however, the general trend in the market is up. This is how I am approaching investments.

• open a 401 or 403b plan: In this plan, I am putting away 10 percent of my income into a very broad mutual fund. A very broad fund like the Vanguard 2045 retirement fund has very low expenses in the range of less than 1/2 percent. Because you are putting money into the market in a “dollar cost average” way, its much better to put it into a mutual fund as this limits the amount of fixed cost money that you spend buying into a stock. In addition, you know that you will never do worse than the market and with retirement horizon far away, you won’t be put in a bind if the market dips. Why invest while your in residency? If you can’t because of cost, then its understandable, but I just feel that invest now, invest less later especially since I’m not using my left over money anyway.
• open a roth IRA. I started this year because I’m actually making a salary. The cool part about a roth is that you can take money out to buy a home. If you are saving money to buy a house down the line, its much better to invest in roth than a traditional taxable account because you don’t get taxed twice. This means that you pay income tax on your money but you don’t pay capital gains tax on it when you take it out. Another thing about roth is that i know I won’t qualify for it down the line because my income will be too high when I start making real money after fellowship. It is also a “use it or lose it” deal. So if you don’t contribute this year, you can’t go back and contribute. I’m also relatively conservative in this. However, I use ETFs or exchange trade funds which follows an index. You could also follow a retirement mutual fund approach also.
• open a taxable brokerage account. This is where i’m a little more adventurous. I tend to buy small and midcap companies with higher P/E ratios. So what do you do if the company stock that you bought goes down tomorrow? Think about the reason why it went down. If earnings reports state that there was a significant drop in earnings, there was just some really bad news, if the company lost its competitive advantage, then it may mean that you should sell. However, if there is a dip in the price for no real reason except the market in general is headed that way, then it may be a buying opportunity. If the company continues to drop in price, there are 2 choices, either the market knows something you don’t know about or its an irrational drop in price. If its an irrational drop in price, don’t sell, I would consider continuing to buy in.

Bottom Line: You should really consider getting involved with investing and don’t let the complexities and the swings in the market prevent you from that.  There is a lot of psychology involved in these uncertain times, but by really looking at the reasons for these various swings, you can come out ahead.

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