by Archie M. Richards, Jr., CFP^®
December 26, 2005

Ethel writes, "For my investments, should I use mutual funds or exchange-traded funds? I have $270,000 in an IRA and $150,000 in Certificates of Deposit."

Either choice works, Ethel. For index funds, use Vanguard. For ETFs, use the brokerage firm Foliofn. The 12/5/05 column tells more about Foliofn.

But Ethel, why on earth are you holding $150,000 cash?

It should never feel right to buy stocks. When prices are low and the news is poor, no one wants stocks. When prices are high, sure, the news is great, but one worries that the prices may have risen too far.

There are always reasons not to buy stocks. Let's say this weren't so. Let's say that a higher power tells us we no longer have to worry; there'll be no more bad news. Just step in and buy stocks.

The trouble is, everyone would hear the message. No one would want to sell at current prices. Prices would immediately rise by 10 times or even 100 times, depending on the higher power's credibility.

But if the higher power later turned her attention elsewhere, yikes! The prices would plummet back to where they started.

Without divine interference, there's always bad news. We have to get into stocks anyway, to benefit from their long-term uptrend.

Don't expect to buy stocks only when everything looks great. The best time of all is when hardly anyone wants stocks and prices are low. You then have to disregard the bad news, remind yourself that prices go up in the long run, hold your nose, and jump in.

Easier said than done, right? After all, we don't live in the long term. We live in the present - a present that changes second by second. If all those seconds are filled with lousy news, we become preoccupied with misfortune. Short-term bad news crowds out long-term good news.

If you're a social person who depends on the company and approval of others, buying stocks in the face of bad news is almost impossible. You're afraid of your friends' ridicule.

But if you're a loner, you tend to rely on your own judgment and take the opinions of others with a grain of salt. You realize that the media thrives on bad news and amplifies it to fulfill its own needs. You're sometimes able to disregard bad news, buck the trend, and buy when the prices are low.

But even being a loner may not work. Let's say you decide to hold cash until a selling panic occurs. You wait and wait and . . . .

Whaddaya know, the market does fall.

But is it a panic selloff?

Nope, people don't seem scared enough. You stay out.

Drat! On this occasion, the market turns around and starts rising before the selling becomes extreme. You're left with cash that earns measly interest while the people who bought stocks are pulling in heavy money.

Finally, you get tired of waiting and buy anyway. But - drat it again! - that's when the market starts going down!

Making consistent and correct predictions about market trends is nearly impossible. The market is always a surprise. It goes out of its way to make us wrong in the short term.

But there's a way around the problem: Assume that when you make investment moves, the market will make you wrong in the short term. Assume that if you buy, prices will initially fall. If you don't buy, they'll rise.

Take it for granted that things won't work out in the near term. When this proves true, remind yourself that the temporary losses are not your fault.

Getting rid of guilt about short-term losses makes it easier to ponder long-term gains. It enables you to buy stocks when you ought to buy them - when you get the money.

Are you holding cash you won't need to spend in the next five years? Invest it, mostly in U.S. and foreign stocks. Look past the short term. Over the long pull, stock prices go up.