"Everything I do seems to make me lose my money. I invested in the Vanguard S&P 500 index, and that has lost money this year. My global technology fund, same story. My 401(k), same story. I have some equities - Microsoft, Intel, Cisco, Oracle, Sun, and Nortel - aall have lost me money. I am 31 years old. I would like to keep investing, but I would like to make at least modest gains."

I've been getting a lot of questions like this one recently. For good reason: Many people are dismayed that their stocks have taken a nose-dive this year. They are wondering what to do. Should they get out of the market? Stay the course? Or sell?

The recent pick-up in stock market volatility partly reflects the dead heat race for the presidency. An even greater force behind the stock market's gyrations is concerns over the path of corporate earnings in upcoming quarters as the economy slows. Yet both of these factors weighing on the market are close to a resolution. Pressure is mounting to bring an end to the election standoff, and investors are adjusting their earnings expectations to a moderate growth economy.

Still, this year's market drop is a brutal reminder that stocks are risky. It's in the nature of the beast. It's at times like this that investors, especially new investors, should steer clear of the emotional extremes and stick to the fundamentals. And to me, that means a renewed focus on the benefits of diversification.

Now, I've commented before that I expect stock market returns over the next two decades will pale next to the record returns of the past two decades. Still, if you believe the U.S. will remain a leader in the global economy, full of digital entrepreneurs and world-class companies, you'll want to own stocks. If you think the worldwide embrace of capitalism is enduring, you'll want to own a slice of international equities. The way to manage risk is to include stocks in a portfolio diversified across a variety of assets, including bonds and cash.

My answer to the 31 year old who lost money in the market? Own a broadly diversified portfolio, preferably through index funds. Adjust the portfolio to reflect your ability to withstand stock market risk, which is probably much lower than you thought at the beginning of the year.

And then stay the course.

 


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