ABC News May 25, 2010

How Should You Invest Your Money in a Volatile Stock Market?

GMA
GMA

The stock market has experienced volatility in recent weeks, due in part to upheaval in global trading.

Stock markets around the world fell Tuesday on worries that Europe's problems will slow global growth and demand for crude and gasoline, according to The Associated Press.

The Dow Jones Industrial Average was down more than 200 points and below the 10,000 mark for most of the day on Tuesday. It cut almost all the loss to close down about 23 points. The NASDAQ closed down slightly, while the S&P 500 closed a little higher.

So with all the instability in the markets, how should the average person invest his or her money?

Dave Ramsey, a radio host and financial guru, and Mellody Hobson, president of Ariel Investments and "Good Morning America's" personal finance expert, appeared on the show to offer some timely advice.

Q: I'm a regular investor. Is "stay the course" still the best strategy, given today's turbulent global market?

A: That is still the best strategy, according to Ramsey, who advised that people think about their investment decisions in the long-term. Hobson agreed, saying people shouldn't overreact when there are occasional disturbances in the global markets. She pointed out that while governments in Europe may be experiencing fiscal trouble, the U.S. government's fiscal foundation remained strong. The globe's interconnectedness means that markets' effects on each other will be felt more quickly, but that's no reason to make a rash decision, she said.

Q: Some people believe Tuesday's market activities were the precursor to a massive market crash. Why should they remain in the market at all?

A: Ramsey pointed out that the American economy was stronger than ever, with checks and balances in place to prevent the market from crashing again. Hobson mentioned that the stock market has continually outperformed other investments. The Dow Jones started the last century at 68 points and ended at 11,500, she said.

Q: I'm a baby boomer with older parents who want to get out of the markets completely. What's your advice for my parents?

A: People who are in their 70s and 80s should have less exposure to the stock market than younger people, Hobson said. For liquidity and safety, more of older people's investments should be in cash or bonds, she noted.

Ramsey said baby boomers should assure their parents that the market is strong. If their parents continue to be fearful, they could begin to invest in conservative types of mutual funds.

Q: I'm worried about my 401(k). Can you recommend any new strategies?

A: Make sure your investments are diversified, but stay put, Ramsey said, reminding people to think long-term.

Hobson noted that 401(k)s were returning to pre-2008 fiscal crisis levels, and reminded that the market rebounded from the lows after the Sept. 11 terror attacks and the crash of 1987.

Q: Are gold and government bonds safer investments now?

A: No, they aren't, Hobson said. Bonds generally return less than stocks, and investing in a commodity such as gold is purely speculative and can result in more volatility, she added. Ramsey said he always recommends mutual funds diversified across growth, growth and income and international and aggressive growth funds.

Gold and silver are terrible investments, he said. In addition, they are at an all-time high, which makes it the wrong time to buy them, Ramsey added.

Web-extra tips

Here are a few additional tips from Mellody Hobson:

If you are concerned about being diversified, you should invest in mutual funds. Buying a mutual fund will spread your risk across all the stocks that the particular mutual fund holds.

Make sure you contribute up to the company match in your 401(k). This is free money and you should think of this as part of your rate of return. So for example, if your company matches 50 cents on a portion of your contribution, then you have actually made 50 percent on that portion of your investment.

As you grow older you should re-evaluate your portfolio. When you are younger almost all of your portfolio should contain stocks, as that will give you the best long-term growth potential. As you near retirement you should cut down your stock exposure, and move some of your portfolio into bonds and cash in order to protect your money for your retirement years.

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