So you missed the dot-com boom of the late '90s, when it seemed as if everybody except you struck it rich. And you weren't paying attention when the Dow Jones industrial average tripled in value during Bill Clinton's eight years in the White House. It isn't as if your 401(k) - if you've got one - isn't doing fine, but it doesn't give you the same thrill.
You want to be the one telling the stories about how you got in on this IPO or that penny stock and now you're buying his and hers vacation homes. So what do you do? The stock market is booming again, with the Dow zooming past 13,000 and both the S P 500 and the NASDAQ at their highest levels in nearly seven years.
Is it time? Is it safe? "It depends on what your goals are," said economist Jack Kyser.
"For a lot of individuals, the market is too risky. It requires too much knowledge to go into it on your own." Warren Buffett, one of the greatest investors of all, was criticized for not getting into technology stocks during the dot-com boom.
Folks made millions, but Buffett kept Berkshire Hathaway far away from dot-coms. His explanation was simple: If you don't understand a company's business
If you understand what a company does, how it does it and where the money comes from, you can make a reasoned decision on whether to risk your money. Braydon McCarville of the Internet site themoneypost.com, lists four things good to know before investing in a company.
1. What's the "smart money" doing? What are the large shareholders or top executives at a company doing with their stock?
2. What's the price-to-earnings ratio? The P/E ratio can tell you if a stock is relatively undervalued or overvalued.
One that is undervalued would have a lower P/E ratio than other companies in its sector. 3. Technical analysis, for which there are numerous tutorials on the Internet.
One of the easiest, most useful is activity and volume of the stock over a period of time. 4. The management team.
It can help to know where they have worked before and what they did while there. Is a cost-cutting team on board or one looking to expand? "Do your homework, write out your goals and when in doubt, get advice," McCarville said.
"Knowledge is the key to being successful at just about anything." Mitchell E. Kauffman, an independent certified financial planner in Pasadena, agrees that preparation is crucial.
"It's always important to go in with a plan," Kauffman said. "When the markets are high, they are often poised for volatility." To make matters worse, inexperienced investors frequently exhibit bad timing, Kauffman said, selling low and buying high.
" relative or a friend has a hot tip on a stock," he said. "That's the classic case where most of the time you'll end up in a situation that's inappropriate - and with a higher level of risk tolerance than you might be prepared for." Kauffman said a significant portion of his clients are baby boomers who have not made adequate financial preparations for retirement.
"Initially, when clients come to see there has often been a wake-up call like a death or a relative with illness," he said. "They have to step out of their daily routine and and look where they are going. We help set up some goals to help them get to where they want to be.
" Tools like dollar cost averaging, where an investor buys a mutual fund or securities using a consistent dollar amount of money each month, and principal-protected programs can be useful tools, Kauffman said. Dollar cost averaging enables an investor to avoid getting caught up in the rising and falling of the market. If you're investing $100 a month, then you're buying fewer shares of stock when stocks are high and more shares when the price is down.
Kyser says there's one fascinating difference between the current run-up in stock prices and the late '90s. "This time around, day traders are not at the party," he said. "Last time, all we heard about was the day traders and how much money they were making.
This time, nothing." "Anybody who wants to play the stock market really needs to approach it with caution," Kyser said. "You are not going to get rich overnight.
You really have to put in the time and effort to study it, especially if you have any plan to pick your own stocks." The easiest, safest way for most people to get into the market, Kyser says, is to research various mutual funds and then pick one. With a mutual fund, you're relying on somebody else's decisions, but that also means you're getting the benefit of their inside knowledge and expertise.
You're not going to buy that Ferrari next week, but with the right fund, you'll build wealth steadily without a great deal of risk. Staff Writer Kevin Smith contributed to this story.
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