Motley Fool Advice: Buy Then Back Away
LIANE HANSEN, host:
So what does all this mean for you and your portfolio? Seth Jayson is a senior analyst for The Motley Fool, a group of investment experts. He says they've got a simple rule.
Mr. SETH JAYSON (Senior Analyst, The Motley Fool): When you are buying individual stocks, know the companies, understand the stories. Buy them when you believe they're cheaper than they will be selling in the future, and then just sort of stop worrying about it. We've always been advocates that if you have no time and no interest in stocks, that you should really be in a low-cost index fund. I would argue that you need to be in some international indexes as well as, you know, U.S. S&P 500 index fund, and just leave it alone.
If you, as we do, find stock research to be fun, and you believe you can outperform the market - and we believe a lot of people can - then you need to just concentrate on the basics. But it really is the same story. You just need to keep buying the companies you understand when they get cheap, and then stop worrying about what the next few days, or few weeks, or even year looks like.
HANSEN: So your advice for people, things not to do, is panic.
Mr. JAYSON: Panic is absolutely natural for us. But what we find is that people who respond to these really lizard-brain impulses when this happens, they tend to buy high because they're enthusiastic, and then they sell low when they're afraid. And one of the best things you can do is not watch your portfolio. Take your dog for walk. If you don't have a dog, come and take my dog for a walk. Most people will see better results for behaving that way.
HANSEN: I think some people who are probably more frightened than others are those who have retired and they have a 401(k), or people who are about to retire. What advice would you have for them?
Mr. JAYSON: Well you know, as you get older, towards retirement age, you really need to have less exposure to stocks that may need to be sold at some time during the next three years or so. We use a rule of thumb here, and I really believe in this, I follow this rule myself, which is that I do not put in the stock market any money that I believe I will need over the next three to five years. And that means to buy a house, that means to buy a car, that means to send a kid to college, that means to pay the bills. There's no reason to put money into the market if you think you're going to need it. Market money should be money that you forget about.
HANSEN: And don't gamble with the rent money, in other words.
Mr. JAYSON: Yeah. Unfortunately, there's a lot of evidence out there that people do do that, however. They get in late, and they try to make everything back very quickly with a few big scores as they get towards retirement. And that ends usually very badly.
HANSEN: Former Fed Chairman Alan Greenspan last week called this a once-in-a-century financial crisis. Is the sky falling or not?
Mr. JAYSON: The sky is never falling. There was huge bubble in a certain part of our economy, and that was in lending - mortgage lending specifically and in investment banking. And that's going to contract and should contract to a huge degree. But this is not the end of the world. It's just going to look like that.
HANSEN: Seth Jayson is a senior analyst for The Motley Fool. Thanks a lot.
Mr. JAYSON: You're welcome.