Beginner Stock Investing: Are Stocks too Risky?

With all the fears surrounding current worldwide economic conditions, should you invest in stocks?  Although past performance is not an indicator of future results, examing the fortitude of the U.S. economy over the past twenty years or so may help to keep things in perspective.

Since 1990, the U.S. economy has weathered many significant events, including:

1990: Savings & Loan Crisis
1991: Gulf War and Recession
1994: Bond market meltdown (Asia, Mexico and Russia all experienced “economic crisis”)
2000: Y2k, Internet bubble
2001: 9/11
2002: Recession
2003: War in Iraq
2007: Housing bubble
2011: Recession, European debt crisis

So exactly how well has the U.S. economy weathered the economic woes of the past twenty years?   In September of 1990, the Dow Jones Industrial Average was trading at approximately 2,500.  Despite some significant ups and downs, as of today (February 24, 2011) the DJIA is over 12,000.  So, despite a multitude of negative economic events, the DJIA was able to increase by more than 400% over the last twenty years!

So back to my original question: "Should you invest in stocks?"

This answer is a personal one, depending upon your individual situation.  However, I will give an opinion; with some caution, I think that the answer is "Yes, stock funds should continue to be a part of a strategic allocation for most investor’s long-term portfolios." 

The cautions would include  the following:

Stock funds: I am a proponent of using low cost index mutual funds, rather than individual stocks for the equity portion of a long term portfolio.

"A part": Rarely, should anyone be 100% invested in stocks.

Strategic allocation: It is important that you develop and maintain an asset allocation that fits your goals and risk tolerance, based on a long-term plan.

Long Term Investment Portfolio: You should only hold stock mutual funds as a long-term investment, not for shorter term savings, such as saving for a down payment on a home, saving for college, or withdrawing funds for retirement living expenses.   A general rule of thumb is that you should not invest money in stocks if there is a possibility that the money will be needed within the 5-10 next years.

As always, be aware that past performance is not an indication of future results and there are risks associated with any investment, including the risk that you may not receive a return of your principle.