Evaluate risks, goals when choosing new investments

Call it what you will — a meltdown, a correction or just another day on Wall Street — but Oct. 27, 1997, was a dose of reality. The stock market had been riding high for the past couple of years, and some may have thought it would never come down.After catching a dose of the "The Hong Kong Flu," the Dow Jones Industrial Average dropped 554.26 points. But contrary to many newspaper stories and television-news reports, this "Black Monday" was not as psychically or financially devastating to most investors as past crashes.
Market watchers predicted a correction in the over-priced market of around 10 percent; Oct. 27 posted a 7.18 percent drop in value. Smart investors didn˜t panic. They saw that the U.S. economy was still in good shape, with strong growth, low inflation and low interest rates. They held firm. The next day, Oct. 28, people snapped up stocks at bargain prices, and the market rallied, posting its busiest single day with 1.2 million shares traded. By the end of the week, the market was humming along nicely.
For many people, playing the stock market is like going to a casino. If they don˜t know what they are doing, it can be a very risky proposition. They may get lucky and hit on a stock on its way up, or tie into a well-performing mutual fund, and make money. But, just like a casino, if they didn˜t know what they were doing, the chances are far greater that they could lose their shirts.
Prior to Oct. 27, the perception on the street was that all you needed to strike it rich was show up, said Larry Varys, a vice president in the investment-banking group at Colorado National Bank. But, while the market is still bullish and the economy still strong, Varys said, investors need to be more knowledgeable if they are going to succeed in the future.
"It˜s the wheat and chaff time," he said. "You need to be smarter as an investor — about the companies˜ basics and about investments in general."
Personal investing, whether it is for retirement, a child˜s college tuition or whatever, is a deliberate thing. It encompasses a wide variety of options ranging from the humble passbook savings account to the futures market. And, despite fads and trends, the basics of personal investing remain the same: Diversify to protect your assets, risk only what you feel comfortable with, and hold for the long term.
"It˜s not rocket science," said Kim Larson, an investment adviser with Edward D. Jones & Co. in Greeley.
According to many financial professionals and personal-finance guides, investing should be on-going, just like savings. You don˜t need to pull in a six-figure income, win the lottery or receive a huge inheritance to begin to invest. But how does one start?
To begin with, people need to take a look inward. What are their goals? How much risk are they willing to take? The investment program needed if a person wants to make money to purchase a house is different from the strategy needed to plan for a child˜s college tuition or for retirement. They need to have some pretty clear ideas about where they want to go before starting out.
People need to take a hard look at how they are spending their money. A recent study found that the average Coloradoan carries a debt load of more than $9,000, excluding home mortgages.
A sensible course of action suggests that the old-fashion virtue of thrift is the basis for any good investment program. People should take advantage of the strong economy and better wages to pay off their outstanding bills. If they are spending less, they have more money to invest.
But investing and savings are often at odds. In order to become wealthy, an investor must be willing to take risks. However, they also need to protect what they have on hand. Losing money on a bum stock is a bad idea, but so is losing purchasing power down the road, which is what happens if you merely sock your money away in a savings account, certificate of deposit or money market.
"You can˜t do it by savings alone," Larson said. "You have to be an investor."
But savings and liquidity are important, and investors need to strike a comfortable balance between risk and security. Most guides suggest that 10 percent of a person˜s investment package be in more-liquid, but lower-yielding, vehicles and the rest in other financial assets such as stocks, bonds and mutual funds.
Some people prefer to handle their investment portfolio themselves. This is fine if they have the time, the knowledge and the desire. However, there is a downside. A recent study by Deloitte Touche Consulting found that many people do not seek financial advice from traditional sources such as bankers, accountants, insurance agents, stock brokers or financial advisers. They prefer to rely on investment tips from friends and relatives.
Armed with these tips, they rush to the local discount broker and buy the stock. They may get an ego boost from thinking they are a savvy trader, but they may be buying the stock when it is priced high, and, could sell when it is low — not a good situation.
Studies have shown that small investors who sell stocks after holding them for a short time often lose money. It has also been shown that when they sell a stock and buy a new "hot" stock, the new purchase frequently does not perform as well as the stock they sold in the first place. The moral of this is that if you are going to buy stocks, hold on to them.
"It˜s time in the market, not timing the market that makes wealth," Larson said.
While investment advisers such as Larson are in the sales business, they are an excellent source of information. They can help develop a sound program for an investor, especially one familiar with the basics.
Many people invest for their retirement, so life insurance, individual retirement accounts, and 401(k)s are important investment options. Many employers offer these in their benefits packages, and investors should take full advantage of them.
Aside from this, there are many investment options out there, and each has its risks and rewards. How, where and when a person decides to invest his or her money depends on how much they are want to risk.
"An investment has to pass the sleep test," Larson said. "No investment is worth losing sleep over."
For many first-time investors, mutual funds are the way to go, Varys and Larson said. The advantages of these funds, which have exploded as investment vehicles, are that for a fairly low cost, a person can get into a wide variety of investments, they are professionally managed and perform pretty well.
The downside is that funds often will underperform the market as a whole, and fund managers were among those who panicked most on Oct. 27.
If they are more conservative, investors might focus on government bonds and money markets.