To the surprise of many, 2010 turned out to be a good year for investors. Major indexes are on a bull run and the U.S. market has doubled since the 2009 low. This year promises to be another good year, Andrew Horowitz, CFP and author of The Winning Investor's Guide to Making Money in Any Market, told WalletPop in a telephone interview.
"With the government back-stopping the economy for now, 2011 will be another good year to invest in the markets," he explained. "In addition, American companies have also become, during these tough times, lean, mean machines, cutting back so much that profits are booming."
Before jumping into the market in 2011, here are four tips novice investors should keep in mind1. Get Smart
If you're the type of investor who looks at your portfolio only a few times a year, Horowitz recommended that you stick to investment tools where someone else is actively managing it. Fill up on mutual funds with low overhead costs. Another good broad-based tool are Exchange Traded Funds (ETF)s.
If you're a little more active, what he called the "passive investor," still rely on broad-based tools like the ETFs, but consider investing in a handful of stocks in industries that you are familiar with or have experience in. Another strategy is to see what's hot. "Chasing trends can be profitable as long as you get off before it ends," he warned.
"I wrote this book so you would not feel so nervous if you decide to work with a financial adviser or to do your own investing," he added. "People will find that investing is not only do-able, but can even be fun."
2. Look at Economic Indicators
Any savvy investor knows to look at indicators like the jobs report, unemployment figures and consumer confidence before investing. But with the government willing to prop up the economy for now, how to interpret leading, lagging and coincident indicators has become trickier than ever, said Horowitz.
For 2011, he recommended paying attention to manufacturing, the money supply and consumer confidence because "the money supply shows that the Fed is going to keep liquidity going and consumer confidence is that at the end, consumers buy. And so the cycle continues."
A possible stumbling block would be China and other emerging markets reigning in inflation and the real estate bubble. Then there are weather-related concerns -- that the flooding in Australia, for example, will eventually have an impact on commodities.
3. Don't be Afraid to Cash Out
Given the volatility of the markets since 2008's drop, the buy and hold strategy just doesn't work anymore. Many, especially those close to retirement age, can't afford to wait out several market cycles. Hence, "look at the goals for each individual position regularly," advised Horowitz. If the story of the stock has changed since you bought it, don't hesitate to get out. "Love a stock a long as the stock loves you."
You can take some of the emotion out of the decision by setting up sell stops – selling a stock when it dips down to a predetermined amount.
4. Uncertain Times Call for Hedging
At least consider a hedge portfolio or move into a short position when the market turns, said Horowitz. Consider options like inverse ETFs, which gain value as the market drops because they are "structured to make money when stocks decline."
Small Cap Investing
Learn now to invest in small companies the right way.View Course »