Are Stocks Hopeless?

Question of the week:I've never before bought an individual stock, but with prices as low as they are right now, I'm starting to consider it. What do you think--is this the right time to buy? -Janice F.

Dear Janice,

Congratulations on not automatically following the crowd in your investing decisions. Despite their recent dismal performance on Wall Street, I believe that stocks (or stock mutual funds) remain the place to be for long-term investors.

If you look back at the time period from 1926 to 2000--years that included a major depression, many recessions, and a fair number of bear markets--stocks as measured by the S&P 500 had an average annual return of 11.2 percent. That beats the pants off the performance of long-term government bonds (5.2 percent) or U.S. Treasury bills (3.8 percent).

We recently asked stock investors in the Armchair Millionaire community how they are feeling about their portfolios in light of the recent market turmoil. Here are a couple of the responses we received.

"My stock portfolio has fallen just like the rest of the market, but I remain very confident with my strategy and always stick to it. Tell yourself to look at investments as long term and always buy good, solid companies with excellent track records." --J. Gaston

"'Buy low, sell high' is a well-known rule. Well, it's pretty low right now and could be a gold mine for those who do their homework, make a plan and jump in. When share prices are down, I remind myself that I haven't lost a thing unless I sell." --Nina

If you choose to start building your own stock portfolio, use time-tested strategies and good old common sense. My checklist will get you going.

The Armchair Millionaire Checklist for Building a Stock Portfolio

Start small. In the beginning, make individual stocks a small part of your overall portfolio. I suggest that they make up no more than 10 percent of your total investments. In addition, no single stock should take up more than five percent of your entire portfolio. This means that if you only have a couple of thousand dollars to invest in stocks, you're probably not ready. Stick with a stock index fund instead for now.

Do the digging. Be committed to doing the research required to make sound decisions. Read (and be sure to understand) earnings reports and estimates, annual reports, and analysts' reports, for starters. Never-and I mean never-invest in a stock just because you receive a "hot tip."

Mix it up. Even after you've done your homework and picked the best stocks you could, you'll still see them fluctuate in price. There's not much worse than watching your entire portfolio drop in value, so protect yourself from this as much as you can with diversification. You can diversify your portfolio in two major ways:

• Buy stocks from different sectors. A sector is a major segment of the economy, such as consumer goods, financial services, transportation and utilities.
• Buy stocks of different-sized companies. The stock prices of large companies and of small companies tend to go up and down at different times.

Resist the impulse to sell. It's disheartening to see the value of your stocks drop, and your reaction may be to sell to protect them from further losses. But doing so will guarantee that you'll miss out on the inevitable market recovery. If you did your homework and bought stocks that remain fundamentally sound, then just hang on tight.

THE BOTTOM LINE: Today's market can make even the most die-hard stock investors question their approach. But by looking beyond the short-term upheavals to the long-term rewards of investing in stocks, you'll be much better prepared to weather the storm.