The Handy Investing Answer Book. Paul A Tucci

of time during which there are more buyers than sellers of stocks, causing overall stock prices to rise, and when investor confidence trends higher in anticipation of rising prices, increasing their investments over time.

      How long does a bull market last?

      Through the year 2009, and for the 113 years since the inception of the Dow, the average length of a bull market has been 2.7 years.

      How much personal wealth was lost during the Crash of 2008?

      Eleven trillion dollars of Americans’ personal wealth, whether in the form of stocks, bonds, cash, or real estate, was wiped out in a very short period of time.

      What percentage of Americans saw their portfolios decline during the period of economic decline 2008–2010?

      Thirty-five percent of all Americans saw a decline in their personal investments.

      What are seven factors to consider before investing?

      According to the U.S. Securities and Exchange Commission (SEC), investors should evaluate their current financial plans; evaluate how much risk they are comfortable taking; diversify their investments; create and maintain an emergency fund; consider using dollar cost averaging when making an investment; rebalance their portfolios when necessary; and avoid circumstances that may lead to fraudulent investments.

      What is “timing the market”?

      Timing the market is the act of using economic, fundamental, and technical indicators to predict future performance and time one’s decisions to enter or exit a stock position based upon this information.

      Why is timing the market controversial?

      Timing the market is controversial because some experts believe the markets are random yet efficient; there are exactly the right number of buyers and sellers at any given point during the day, so the most efficient price is always realized. Because of the randomness of market movements, it cannot be accurately timed. Other experts who trade every day rely on technical and fundamental analysis to determine their trading positions, and believe that—given certain clues—the markets can be timed, allowing an investor to make profit as a result.

      When should I rebalance my portfolio?

      When you rebalance your portfolio, you make a personal decision based upon many factors, including your aversion to risk, your return goal, what period of time you are willing to wait for the return you expect, what industries or sectors make up the portfolio, and how they are weighted. A professional portfolio manager may choose to rebalance a portfolio when a single holding reaches a higher percentage than a certain percentage of the total portfolio, determined well in advance.

Why should I invest my money?

      People invest their money for a number of important reasons. They wish to have some level of financial security now and in the future. They understand the concept of saving compared with spending, and wish to earn some return on their money over a period of time. They also wish to have someone pay them either interest or a share of the profits of a company, or to realize gains in the share prices or value of their investment choices. If you were to invest your money in a bank savings account, the money earns interest in exchange for the bank’s use of the money. If you buy shares in a company, you have the potential to earn income through distributions of profits of the company, and if you sell the shares, you have the potential to sell the shares at a higher price than what you paid for them initially when you invested. If you buy anything of value, and hold it until it increases in value relative to what you paid for it, you are investing.

      What is the most important consideration before deciding to invest?

      One of the most important considerations before deciding to invest is knowing that you can lose some or all of your money when you invest, and that you must know beforehand how much risk you are willing to tolerate. On the other hand, you are also aware that you can make a great return on your investments, and that the benefits of investing may outweigh the risks you perceive with the investment you undertake.

      Depending on your age and how long you have until retirement, you will want to invest in either safer, income-generating investments or, if you are young, gamble on more high-risk, high-interest stocks. The later you start investing, the more you’ll have to save per month to retire comfortably.

      Why is time so important in investing?

      Because of the compounding of our returns, your money can potentially be more valuable over a long period of time. A simple example might be a person who starts to invest at age 18 at five dollars per week. If his overall investments earn 8% per year, he might have $134,000 in his portfolio by the time he reaches the age of 65. If he were to delay for just one year, and begin at age 19, the portfolio will be valued at $10,000 less than if he started at age 18. And if he waits until he is 40 years old to start investing, he would have to put away approximately $32 per week just to have the same amount by the time he reaches age 65. So time does matter when it comes to investing.

      How can I protect my investments before I begin to invest?

      The SEC believes you should ask certain basic questions, whether you are a beginning investor or have invested for many years. Consider if the seller of the investment is licensed to sell the investment, as most financial fraud is perpetrated by unlicensed dealers who are trying to separate you from your money. You should also look into the accreditations of your adviser. Thousands of people have been given poor advice from unlicensed financial advisers, who may try to steer their clients into the wrong investment choice in order to make a bonus or commission on the sale of that investment choice. The SEC also recommends that you check if it has registered and approved the investment sale.

      How do I know if a potential investment is fraudulent?

      If the marketed investment shows that it is too good to be true, it may be fraudulent. Generally, you should compare various attributes of the investment to some benchmark, such as the annual returns, expenses, earnings, or debt. If these comparisons are not in line with the normal returns for this type of investment, you should probably avoid it.

      Do higher rates of returns generally mean that my money may be more at risk?

      Certain more exotic investment vehicles, such as collateralized mortgage obligations, promise higher rates, but are quite risky, as they may be derived from more at-risk loans and mortgage products in order to attract investors. So it is very important to know fully what investments you are making and their inherent risks before you commit.

      What is “dollar cost averaging”?

      Dollar cost averaging is a simple timing strategy of investing, whereby an investor buys the same dollar amount of a stock at regular intervals (say $100 per month of a certain stock). If the price of an investment increases over time, we acquire fewer of these shares. Conversely, if the price of the investment drops, we acquire more of these shares. This lowers the total average price per share of an investment, meaning the investor is able to invest more profitably than if he were to “time the market.” Dollar cost averaging is a worthwhile investment strategy employed by many investors in order to fix the amount invested each period for the purchase of shares, or for the purchase of an investment.

      Why is dollar cost averaging a beneficial strategy for investing?

      When it comes to investing in such investments as mutual funds, the prices may fluctuate as the value of the underlying portfolio may increase or decrease. This fact, coupled with dividends from shares held within the portfolio as well as changes to fees that are charged to account holders, may change the price you pay to acquire shares. Through dollar cost averaging, you are able to acquire more shares if the price drops and fewer shares if the price increases. This means you reduce the risk of acquiring many shares just before a major decrease in the price of the shares, which helps mitigate your overall risk in these investments. Although it is relatively easy to employ dollar cost averaging when it comes to investing in mutual funds, some individual stocks also allow for the regular acquisition of shares. You should consult your