Investor Spring Cleaning: Investing Tips

Investor Spring Cleaning 2011

No sooner did the bull market turn two years old, did a world of worry hit the markets, as revolution in the Middle East and catastrophe Japan illustrated the negative impact of uncertainty. Lost in the blur of current events, however, is that the first quarter is typically one of the best-performing ones for stocks, with March the strongest of the three months. Don't despair. April is even better.Click ahead for some lessons about the market tumult of March and how they relate to core investing
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No sooner did the bull market turn two years old, did a world of worry hit the markets, as revolution in the Middle East and catastrophe Japan illustrated the negative impact of uncertainty.

Lost in the blur of current events, however, is that the first quarter is typically one of the best-performing ones for stocks, with March the strongest of the three months.

Don't despair. April is even better.

Click ahead for some lessons about the market tumult of March and how they relate to core investing principles and the year ahead.

By Albert BozzoPosted 1 April 2011

Presidential Influence

There's another traditional—some would inexplicable—market force at work. And that's the generally positive performance of stocks in the third year of a a Democratic president's first term. In the five cases involving a Democratic presidency, the market has gained an average of 21.3 percent. (It's also largely true, though to a lesser extent, with GOP presidents.) So for the optimists, even a down January might not be a deterrent.
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So far, the first three months of the year support what some might consider a market oddity--strong gains in the third year of a a Democratic president's first term.

According to the Stock Trader’s Almanac, the market’s sweet spot during any four-year presidency cycle is historically the fourth quarter of the midterm year and first quarter of the pre-election year.

In the five cases involving a Democratic presidency, the market has gained an average of 21.3 percent during the third year. (It's also largely true, though to a lesser extent, with GOP presidents.)

Expect The Unexpected

Stock investing is full of conventional wisdom and accompanying platitudes but they also happen to be very true. One is "Stock markets just don't go straight up."After months of gains, strategists were expecting a correction, meaning a major decline (5%-10%) followed by another leg to the rally. Sure enough, it happened, with all three major indices approaching 5-percent declines. The trigger, however, was not the usual market. As one pundit put it... it is always the unexpected, and in this cas
Photo: Kiyoshi Ota | Stringer | Getty Images

Stock investing is full of conventional wisdom and accompanying platitudes, but they also happen to be true. One is, "Stock markets just don't go straight up."

After months of gains, strategists were expecting a correction, meaning a major decline (5%-10%) followed by another leg to the rally. Sure enough, it happened, with all three major indices approaching 5 percent declines. The trigger, however, was not the usual market.

As one pundit put it... it is always the unexpected, and in this case it was the Middle East and Japan.

Investing Rollercoaster

Any correction, of course, creates "a buying opportunity, " another cliché of sorts, and, in particular, the advice to "buy on the dips". The first half of March brought plenty of those opportunities, and it would seem bold, if not wise, investors were rewarded, as US stokes stormed back, nearing their previous highs for the year. And in the case of Japanese assets, it was also a time for "bargain hunters" and "bottom fishers', who bought following waves of panic selling that had devalued things
Photo: Jupiter Images | Comstock | Getty Images

Any correction, of course, creates "a buying opportunity," another cliché of sorts, and, in particular, the advice to "buy on the dips".

The first half of March brought plenty of those opportunities. Investors were rewarded, as U.S. stokes stormed back, nearing their previous highs for the year. And in the case of Japanese assets, it was also a time for "bargain hunters" and "bottom fishers," who bought following waves of panic selling that had devalued things beyond reason.

April: Investors' Month

Opportunistic investors may be in for additional reward. April is one of the best months for U.S. stocks, with an average gain of 1.5 percent over the past 40 years, trailing only November and December. The same, however, can't be said of the second quarter, which is the second worst.
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Opportunistic investors may be in for additional reward. April is one of the best months for U.S. stocks, with an average gain of 1.5 percent over the past 40 years, trailing only November and December. The same, however, can't be said of the second quarter, which is the second worst.

Asset Allocation Is Not Pie In The Sky

Enough trends for the time being. New or existing money, it's good to review your asset allocation—for a couple of reasons. If you like the way you divided the pie, then you probably need to rebalance your portfolio and get the right mix of asset classes and particular stock sectors back to where you set it. With some investments performing better or worse than others, profits and losses have upset your original allocation. If you're feeling more optimistic about one sector or another—say stocks
Photo: Walker and Walker | Stone | Getty Images

Enough trends for the time being. Whether new or existing money, it's good to review your asset allocation—for a couple of reasons. If you like the way you divided the pie, then you probably need to rebalance your portfolio and get the right mix of asset classes and particular stock sectors back to where you set it.
With some investments performing better or worse than others, profits and losses have upset your original allocation. If you're feeling more optimistic about one sector or another—say, stocks—you might want to leave it where it is or even boost it further.

Diversification Is The Spice Of Life

This basic investing tenet is closely linked to asset allocation. Strategists and advisors strongly recommend that your spread around your money into different asset classes (equities, bonds, commodities, real estate, cash). The diversification tenet was given quite a challenge during the financial crisis, because for the first time in memory almost everything lost value. In the aftermath, the virtue of diversification was made abundantly clear in the spectacular and surprising rally in the fixe
Photo: Peter Adams | The Image Bank | Getty Images

This basic investing tenet is closely linked to asset allocation. Strategists and advisers strongly recommend that you spread around your money into different asset classes (equities, bonds, commodities, real estate, cash).

The diversification tenet was given quite a challenge during the financial crisis, because for the first time in memory almost everything lost value.

Since then, the virtue of diversification has been abundantly clear. At various times, there have been spectacular rallies in equities, fixed income, and commodities.

More recently, when stocks were plunging in March, bonds were rising; while tech stocks were sinking, energy ones were soaring.

World's Fair

It's a big world out there and gone are the days when investors could keep their money at home and take it to the bank. Experts say every portfolio should have some international exposure, from stocks to bonds to currencies, and in most cases the more diversified the better. So you can guy a piece of the UK, Russia, Thailand, Brazil and Australia. And there's no shortage of ways to travel abroad: mutual funds, ETFs, currencies, ADRs, American Depository Receipts, which are dollar-denominated sec
Photo: Oppenheim Bernhard | Digital Vision | Getty Images

Gone are the days when investors could keep their money at home and take it to the bank.

Experts say every portfolio should have some international exposure, from stocks to bonds to currencies, and in most cases the more diversified the better. So you can buy a piece of the U.K., Russia, Thailand, Brazil and Australia.

And there's no shortage of ways to travel abroad: mutual funds, ETFs, currencies, ADRs, American Depository Receipts, which are dollar-denominated securities of overseas companies that essentially mirror the performance of the stock in its home country.

Passive Vs. Aggressive

Unlike in psychology, in the world of investing it is passive vs. active. Actively-managed mutual funds cost more because they have to pay the salaries of the manger and his team, marketing costs and who-knows what else. Passive funds—which includes index fund and ETFs—cost a lot less because the investment is not the result of stock picking or any other investment decision but something that literally tracks or shows a market index such as the S&P 500. In other words, sit back and follow the ma
Photo: Oppenheim Bernhard | Digital Vision | Getty Images

Unlike in psychology, in the world of investing the point is being passive vs. active. Actively-managed mutual funds cost more because they have to pay the salaries of the manager and his team, marketing costs and who-knows-what-else.

Passive funds—which include index funds and ETFs—cost a lot less because the investment is not the result of stock picking or any other investment decision but something that literally tracks or shows a market index such as the S&P 500. In other words, sit back and follow the market. It's largely the same with ETFs, which track a basket of securities (stocks/bonds) or indices.
ETFs can also involve commodities, real estate and even more exotic instruments. Another plus is that ETFs trade like individual stocks and have tax advantages that mutual funds don't. On the downside, there's no one controlling the roller coaster.

Consider The Alternatives

We're not talking Vegas or the office sports pool here. If stocks and bonds are not enough (or even too much), there's a lot of real, tangible things in which to invest. Coins, stamps, art, antiques, sunken treasure, horses. Many of them have a low correlation with the stock market, meaning they don't go up or down at the same time. The price of entry can be low but much like stocks you need to do your research and you may be stuck dealing with experts (dealers, agents). Of course, unlike some o
Photo: Don Farrall | Photodisc | Getty Images

We're not talking Vegas or the office sports pool here. If stocks and bonds are not enough (or even too much), there's a lot of real, tangible things in which to invest. Coins, stamps, art, antiques, sunken treasure, horses. Many of them have a low correlation with the stock market, meaning they don't go up or down at the same time.

The price of entry can be low, but much like stocks, you need to do your research and you may be stuck dealing with experts (dealers, agents). Of course, unlike some of the mysterious financial instruments of today, you'll know exactly what you're getting.

DIY Investing

Wondering whether you need a financial advisor? Many professional advisors were burned (as were their clients) during the crisis and more than a few consumers were struck by the irony that the experts still collected their management fees. That and the ever expanding world of financial products and online investing might make going it alone tempting. Among the enticements: the proliferation of low-cost stock and bond index funds—as well as exchange traded funds—inexpensive trading platforms for

Wondering whether you need a financial adviser? Many professional advisers were burned (as were their clients) during the crisis, and more than a few consumers were struck by the irony that the experts still collected their management fees.

That and the ever-expanding world of financial products and online investing might make going it alone tempting. Among the enticements: the proliferation of low-cost stock and bond index funds—as well as exchange traded funds—inexpensive trading platforms for currencies, options and commodities and a seemingly endless universe of readily available advice and data, especially though the blogosphere and chat rooms.