Naked Truth Investing: Is now a good time to invest?

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This is part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

This is a very common question: How do you know when to invest? Have the markets bottomed out? Or are we in for a precipitous decline?

Here is the answer: No one knows.

Here is what we do know:For the 36-year period from January, 1970 through December, 2006, missing only a relatively few days in the market resulted in a dramatic difference in returns.

During this period, the annualized compounded return of the S&P 500 index was 11.23%. But if you missed the 25 best return days, your returns were only 7.82%.

Missing only the 10 best return days in a given year can wipe out all of the market gains for that year.

It would be great if someone could time the markets and tell us when to be in and when to be out. That is what market timing newsletters attempt to do. They are not very good at it.

Studies of the performance of market timing newsletters demonstrate that following their recommendations caused investors to under-perform the markets. Given this dismal track record, it is not surprising that one study of over 15,000 predictions by 237 market timing investment newsletters from June,1980 through December, 1992 found that 94.5% of the newsletters had gone out of business!

What's an investor to do?
  • Determine your asset allocation by taking an asset allocation questionnaire. You can easily find one on the internet.
  • Invest in a globally diversified portfolio of low cost index funds consistent with your investment objectives and tolerance for risk. You can find a good selection of index funds from reputable fund families like Vanguard, Fidelity and T. Rowe Price.
Maybe it is more important to tell you what you shouldn't do.
  • Don't use a broker or advisor who tells you she can "beat the markets." This would exclude practically all brokers and most advisors.
  • Don't try to time the markets.
You should always be invested -- the right way!

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006)and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.
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