Where Should Average Investors Invest in this Uncertain Market?

Editor’s note: This is a guest post by Michael Trinkle from ForexTraders, an online web resource about finance, investing, and analysis.

As market pundits continue to debate the latest movements of the market or lack thereof, the average investor remains hard pressed to find the best place to put his hard earned capital. Market uncertainty, brought on by an election year and debt problems in Europe, has soured consumer optimism and dampened his will to invest. The “flash crash” in May and the finger pointing that ensued over trading practices of hedge fund managers have done nothing to increase an average investor’s confidence either.

The government continues to search for causes for the sudden drop in market prices last May, but no answers have been forthcoming, leading many investors to believe that the system is rigged. A new AP-CNBC survey shows that “61 percent said the market’s recent volatility has made them less confident about buying and selling individual stocks. And the majority of those surveyed, 55 percent, said the market is fair only to some investors.”

Another study suggests that investors have done more than talk about their concerns. They have moved their funds out of equities. “From January 2008 through July 2010, investors pulled a net $244 billion out of stock mutual funds. While all that cash was flowing out of stocks, investors put nearly $589 billion into bond funds over that 31-month period.”

 Many analysts believe that bonds, or fixed income funds, are a ticking time bomb at the moment. The 20-year bull market in bonds has been declared over by those in the know. While bonds may offer a modest temporary return to the holder, the Fed and Bernanke cannot keep interest rates down near zero forever. At some point as the economic recovery proceeds to its next stage, a rise in rates will necessitate an opposite fall or depreciation in bond values. A temporary holding strategy is called for, but most investors have never professed to understand or been willing to emulate the habits of a short-term trader. However, timing an appropriate exit is crucial for today’s bondholders.

If not bonds, then what? For the majority of investors, investing is not their day job. They can find an investment advisor to manage their portfolio, but that takes time, and you truly need to understand investing principles in order to manage your advisor’s efforts properly. Researching stocks is another time consuming activity, and no amount of research removes the risk that a company will not perform in the market.

If you are going to be in the stock market and benefit from its ability to produce material returns over time, the best approach is to employ the diversification that mutual funds and exchange-trade funds, or “ETFs”, provide the average investor. Your issues are then more manageable in that your concerns focus on fees charged by the fund managers and the specific sectors of the market that each fund chooses to exploit.

The market has behaved in an irregular manner for most of this year as the developed countries of the world struggle with economic recovery and crises seem to exist around every corner. A quick look at the S&P 500 Index reveals that the market for the past year has oscillated between 1,010 and 1,220, refusing to make up its mind and break out of this sideways pattern.

This kind of market condition actually favors an investor with a trader’s mentality, and although most investors tend to scoff at traders, there are a number of skill sets in the trader’s toolbox that could enhance the value of any investor’s portfolio.

Forex trading is one example where both fundamental and technical analysis can be used to advantage. Strategies can vary over minutes, days, or many months if necessary to secure the sought after gain. Forex traders never enter a market unless technical indicators are favorable and only after setting stop loss orders to prevent loss from an adverse movement in the market.

These tactics are not rocket science and can easily be used when acquiring shares in ETFs or mutual funds. If stocks are not for you, then Gold or Silver ETFs may offer more security in these times of risk and potential inflation. Timing your entry when indicators suggest that the market is in an “oversold” condition is the most basic investing strategy ever conceived, that being to buy low and sell high, the only way to truly make money in any market.

The current market uncertainty may be with us for some time to come, at least until Election Day in November. There continue to be indications that our economy is slowly improving; thereby suggesting a favorable upturn is inevitable. However, success is sometimes 95% anticipation, which suggests that timing your market entry is critical for positive results.