Photo: Flickr / hto2008
You would have to be living in a cave to miss the meteoric rise of the stock market these past few months.The Dow was cruised through 13,000, the Nasdaq broke through 3,000 and the S&P has made 1,300 a mere speck in the real view mirror (and even 1,400 was not safe).
We are well off our lows during the financial crisis and the pundits are clamoring to talk about how we’re in a bull market.
Where should you invest? With the President travelling the nation and talking about energy independence, you’re probably interested in a solar panel manufacturing company like First Solar, or an installer like Vivint, or just a clean energy ETF like the iShares S&P Global Clean Energy ETF. I admit I was tempted, but then I realised I know extremely little about the solar energy business and I was reminded of the old investing adage – “invest in what you know.”
Invest in the Long Term
For most us, investing isn’t about making the quick buck, it’s about making smart decisions so we can grow our nest egg while we work. It’s about putting enough away into a 401(k) or a college fund, so that it’s there when we need it. While getting a quick return sounds appealing, it’s not very useful in the long run.
Consider this – what if you invested in a solar panel company and had a 50% return this year? Would you sell it? Hold onto it? How does that fit into your plan? Are you able to keep up with the trends or the knowledge? Would you know that China subsidizes its solar panel manufacturers and is undercutting American manufacturers? Do you have the time to learn the business and keep up with it?
If the answer to those questions is a mixture of “I don’t know” and “I’m not sure” then you shouldn’t be involved in those stocks.
Where You Should Invest
If you don’t have the time to do research on individual stocks, you should consider ETFs or mutual funds, which are run by managers who are paid to research individual stocks. If you don’t want to pay a manager and his or her team to do that research, consider index funds – they’re often very cheap because there is little research involved. Index funds blindly match an index.
If you want to invest in a particular sector, such as solar, a clean energy fund might be the safest way. By diversifying across sectors and companies within each sector, you can hedge your bets on which sector will grow the most. If you choose a fund, you still need to do your research because not all funds and ETFs are created the same.
For example, the iShares fund I listed above owns some ADRs, which introduce currency risk. It’s largest holding, at 7%+, is a clean energy utility company in Brazil (Companhia Energetica de Minas Gerais, known as Cemig). It’s value is affected by the foreign exchange rate between Brazilian real and the United States dollar.
At the end of the day, the lesson here is that you should invest in what you know and avoid chasing the sectors and stocks that the pundits are highlighting. They’re paid to build excitement and buzz, you’re only paid if you make the right investments. Investing in what you know gives you a better shot at success. Personally, I prefer a mix of blue chip dividend stocks, like Dividend Aristocrats, and index funds.