The stock market is positively sizzling today, as Wall Street's optimism pushed the Dow to a two-year high. Sounds tempting, eh? Before you wade in with your wallet, consider this short list of "Do's" and "Don'ts." Consider it now!
- DON'T assume that massive valuations of internet companies mean that you need to rush into tech stocks.
- DON'T assume that good housing data means you need to rush into housing stocks. We've got a few extra houses laying around already.
- DON'T buy stocks based on one day's good news. Oh, "Bank of America Corp. shot up 5.3 percent to $14.05 after the bank settled a dispute with Fannie Mae and Freddie Mac"? What goes up will never go back down, that's for sure.
- DON'T assume your "financial planner" is a good arbiter of risk.
- DON'T ever pick stocks based on what some experts say in a widely-read publication for the general public (that includes this one). That advice is outdated as soon as it gets published. If not just total bullshit.
- DON'T have any faith in your own ability to beat the market. The market is much swifter than you.
- DON'T invest based on headline-grabbing M&A news. Most M&A's don't really pan out, anyhow. If you're not an insider, you're dumb money. Deals are driven, more than anything, by how much they'll help the company insiders who are in the position to make deals in the first place.
- DON'T pick mutual funds based on how well they've done in the past. Remember: reversion to the mean.
- As a matter of fact, DON'T buy managed mutual funds at all.
But what to do?
- DO buy low-cost index funds, like these from Vanguard. DO diversify. DO reinvest your dividends. DO leave them alone. DO forget they even exist. DO keep adding whatever little bit of money you can to them, on a regular basis. DO keep doing this in 2011, and 2012, and the next 20 or 30 years beyond. DO NOT FUCKING TRADE THEM OR CASH THEM OUT UNLESS YOU ARE FACING ABSOLUTE DESTITUTION.
When it's time to retire, take a look at your index funds. They have increased in value by quite a lot, with absolutely no knowledge necessary on your part. You can't beat the market. But you don't have to!