University of Wisconsin - Extension

The past year has been quite painful for most investors and a reminder of the risks involved in investing--that investments can go down as well as up.

"No one likes to lose money. It can be quite a shock to get your quarterly statements and see how much less your accounts are worth now compared to the last quarter or last year," says Linda Boelter, Certified Financial Planner and family financial management specialist for University of Wisconsin-Extension.

"After several years of extraordinary gains, most markets have experienced significant losses, bringing stock prices and market indexes back to where they were two years ago."

One out of two households in this country now has investments in the stock market, most frequently in mutual funds or retirement plans, Boelter says.

Most people recognize that historically, investments in stocks have provided a higher return than fixed return investments, such as bonds or certificates of deposit. But the tradeoff for the higher returns is greater price volatility.

Downturns in the market are a normal part of investing--and a reminder that investors need strategies for dealing with market risk, explains Boelter.

"The first strategy is to remember that investing is a long-term process. Generally, you should not be investing money that you will need in the next five years," Boelter says.

"Taking a long-term perspective helps you ride out the downturns in hopes that the market will improve as the economy improves and the value of your investments will be greater in the future."

Another strategy is to diversify your investments--don't put all your eggs in one basket.

"When technology stocks were doing so well two years ago, many people over weighted their portfolios with tech stocks," notes Boelter. "After the recent ?tech wreck,' it's clear that diversification is still important."

Another strategy to deal with market ups and downs is called dollar cost averaging. It's a systematic process of investing a fixed amount each month, regardless of the price of the investment. As a result, you purchase more shares when the price is low, and fewer shares when the price is high.

Boelter says dollar cost averaging has two advantages. First, it reduces the average cost of your investment over a period of time--increasing the likelihood of profit. Second, it provides discipline to your investing. By making regular monthly purchases, you are continuously adding to your position without having to worry about how the market is doing.

When you sign up to make monthly contributions to a retirement plan through your employer-- 401(k), 403(b), or deferred compensation plan--you are using dollar cost averaging. You can also use this strategy by setting up an automatic investment plan with a mutual fund company.

For more information on investing for your future, contact your county UW-Extension office for a copy of "Investment Basics," a comprehensive publication that covers the basics of investing in stock, bonds and mutual funds.