Wall Street now brims with joy as markets continue to surge. Reports and stories abound on projections of the continued growth of markets. This optimism should be recognized for what it really is: wishful thinking and not reality. This is the perfect time to stop for the time being and analyze the present circumstances. History has taught us that markets invariably revert back to their fair value. Those who speculate will lose money.

Timing the market does not work. The stock market is similar to a Russian Roulette. Only a few are lucky enough to pass unscathed. It is not fair to assume luck will remain with the player all the time. It makes sense to be always on the guard.

Timing and diversification

Time is important. Timing is not. The quantity of time the money gets invested is related to success. Investing in the stock market brings large amounts of money as profits only when the money is kept invested for a longer period of time. Chances of failure are more when the investment is done for a short time. Another excellent rule to follow is diversification. This may go against the prevailing mood when it makes sense (at least on paper) that investing the whole fund on one hot stock to reap high returns. The problem is that such kinds of investment rarely pans out. It is a much better proposition to spread the investments among a number of asset classes. This strategy is better too. This may sound boring, but it is better than seeing your hard earned money disappear when it is invested in a single stock.

Interest rates and risk

The element of risk should be comprehended well. It is natural to feel safe in packs or be a part of something. This kind of group behavior feeds the “now before it gets too late” behavior. There are safe investments and there are risky investments. Both are essentially the same. The investor should concentrate on the money being held in each. These, in turn, depends on the risk appetite and the time horizon for taking money back from the markets.

Interest rates have never made anyone rich. These generate returns much less than the prevailing inflation. This becomes painfully true if the money is invested in the short-term bonds. Buying longer-term bonds are not recommended. This is as the longer term bonds could turn out to be extremely volatile.