The
Dow Approach
The
Dow Approach
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FOOL GLOBAL WIRE LEXINGTON, KY. (Mar. 11, 1997) -- As the Dow continues to go higher and higher, it's not surprising that some investors, especially ones relatively new to stock investing, are nervous. And they should be unless they're prepared for any market downturn. Does that mean you should pull out of the market and wait for the big correction to hit? Absolutely not. We believe in staying fully invested at all times, but what exactly does "fully invested" mean? When we talk about investments here in the Fool, we're only speaking of money you've set aside with the sole intention of letting it grow for many years, an absolute minimum of five, but preferably decades. We're not, however, talking about money you may need for anything else in the next few years. Not Stephanie's tuition money. Not money for a down-payment on a home. Not money, as one poor young man I corresponded with recently hoped to do, that you'd like to grow fast enough that you can afford a honeymoon six months later. (His bride to be would have been justifiably offended if he had lost not only the honeymoon possibility, but also the engagement ring reality in such a gamble.) So, how do you know what's investment money and what's not? There are a couple of things I believe everyone should cover before ever calling a broker to place that first trade. The first is a will. Unless you want the state to decide what becomes of your assets, have a will drawn up, even if it's so simple that it can be done in half an hour. If your estate is too complex for the generic wills available from companies like Nolo Press, shell out for an attorney. It's worth the peace of mind. Second, make sure you're adequately insured -- life, home, health, etc. (I won't go into the details on life insurance here today, but I firmly believe that life insurance is not an investment. Buy what you need as genuine insurance coverage, a way of replacing lost income potential for your family should you die. When you no longer need it, don't carry it.) And then set aside $3,000 or $4,000 as an emergency fund (more if you're retired, perhaps). A lot of financial planners will tell you to set aside as much as 6 months' to a year's expenses for emergencies, but I think that's shelving too much useful capital. If you're adequately insured, there isn't much that would require an immediate outlay of more than a couple thousand dollars. If in a dire emergency you needed more, you could always dip into your investments in a pinch and have cash from them within a few days.
Then and only then should you be talking about your "investments." Once you've
met these conditions, your investments can truly be viewed as long-term savings
where you have time to ride out market corrections and add money regularly.
I thought it was time I made clear again this vital assumption which underpins
all of our discussions about leaving one's money in the market at all times.
No one's talking about "gambling" with the rent money or risking Jimmy's
piano lesson tuition. So whether a correction is imminent or not, we're looking
further ahead than the next leg up or down in the market. Fool on! (c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. |
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