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Let’s face it. We as individual investors are very afraid right now. Did you notice all the articles from us personal finance bloggers about the market throughout the year and the lack of them right now? Part of it is because we all want to cover the thanksgiving spending etc etc, but it is also because many of us don’t even want to think about our investments! If March or August of 2007 was a fearful time for individual investors, now is many times worst!

So, what is our investment advice now? What should we do in these times when people are telling us that the decline just started because all the mutual fund investors (the general public) will start selling once they receive their quarter statement and realize that their investments returned nothing for the past year?

Instead of giving some general advice, let’s break it down to different types of investors so the advice is more specific. There are three types of investors: passive investors, stock pickers, and short term traders.

Passive Investors - I hope this includes most of us because it takes a considerable amount of time to invest in stocks. We buy low cost index funds and have a long time horizon. For us, we shouldn’t care about volatility and we should buy more shares right now. Even better, we should setup automatic investing so we keep investing whether the market goes up or down. If you are very unemotional about your investments and have a VERY LONG time horizon (5 - 10 years+), you may want to look at the financials but buy the ETF that looks at the whole sector instead of buying a specific stock because you are a passive investor.

Stock Pickers - Many of us fall under this category. We use a portion of our money to buy into certain stocks because we feel like we can outperform the market. Those of us that buy individual stocks should move into defensive stocks. Just think of all the companies that people would still buy from no matter what the economy does. P&G is a great example because they sell many day-to-day products like soaps. These types of companies aren’t exciting in bull markets but they deliver the necessary consistency that people can count on in a bad economic environment. Now is not the time to bottom pick financial stocks. Even though they may seem very cheap to you, it may just keep going down in the short to midterm. Just wait till these stocks seem to keep going up to jump back in but there is no reason to get in at this point.

Short Term Traders - Well, I’m just going to state the obvious for you guys since you probably shouldn’t be trading if you don’t know this already. I would either see which stocks/sectors you can short or just sit and do nothing. There is absolutely nothing wrong with doing nothing. Sit with your cash and just wait till there is a bull run again. Whether it is 3 months or 6, you can just ride is out!

Mixture - In the real world, almost all of us fall under a mixture of all 3. If we are smart, we will try to separate into 3 different portfolios and follow the strategies accordingly because it will be impossible to not get confused!

Now is a fearful but interesting time. What we do during these volatile times is much more important because we can really destroy our portfolio and wealth by acting inappropriately. Whatever you decide to do, not losing money should be number #1 on the list. To help that, the first thing we need to do is stop investing based on headlines.

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To validate the benefit of more exercises through the use (play) of my Wii, I went to the golf course yesterday.  I was amazed that I can hit the ball more consistently and that the ball traveled further!  I had to adjust to the new found distance but it was a nice surprise!  This is exciting for me and will definitely keep me addicted to my Wii even more.  While I play the video game console, while don’t you check out these great articles from around the blogsphere?

• My Two Dollars discusses how he picked out his health insurance plan.  If you are also a self-employed individual, remember to check this out since you might learn a thing or two!
• Get Rich Slowly shows us a great way to deal with telemarketers!
• Living Off Dividends sights that Ben Stein is buying ETFs that tracks the financial sector!  The article also says that another money expert, Jim Rogers, thinks the financial sector is in deep trouble.  This just goes to show to never trust the experts because one of them has to be dead wrong!
• Vik Dulat lists 5 ways to getting things done.  Simple yet effective!
• The Digerati Life picks and shares with us 3 great lessons learned from the old man.
• The Simple Dollars explains how we can get started investing in index funds.

Carnivals and Festivals of the Week!

• Carnival of Personal Finance
• Festival of Frugality

A reader asked in my article (why we always recommend buying low cost index funds) what is considered a low cost index fund and I decided to share this on a separate post to give it more visibility as I’m sure more than one person will benefit from this.

Basically, I look at all the cost of owning an index fund vs buying all the stock the index holds without commission.  These include –

Load – There are some funds that require a front end or back end load (essentially a fee for buying or selling the fund).  If there is a load, I would not consider this as a low cost fund.

Expense Ratio – Every fund will need to have a team to maintain the paperwork, do the actual buying and selling of stocks if people cash in and out of the fund etc so there is always a fee the fund company charges to maintain the fund.  Anything under 1% I would consider low cost but it will depend on the index.  The best thing to do is to compare these with others that track the same index.

Commission – I also look at how I can purchase and sell these funds.  For example, if my only option was to buy a fund using my ETrade brokerage account, it would cost me $20 per transaction.  This is okay if I buy $10,000 dollars at a time (0.2% commission rate), but if I have automatic purchasing each month for my Roth IRA for the index fund at $20 per transaction, then I am paying a 6-7% commission rate, which doesn’t make sense at all.

I know that technically this shouldn’t be considered into the low cost vs non-low cost equation but all costs need to be calculated!

A very good option for low cost funds is the Vanguard funds because they have ultra low expense ratios and I think you can buy index funds with no commissions (please correct me if I’m wrong with this) if you have an account with them.