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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Wednesday, May 31, 2006

Market Trends

Being a wise investor takes a little bit of knowledge and some discipline.

In the late 1990s the technology and internet stocks were hot and that was a trend, but all trends must end and the internet bubble burst on March of 2000. From this you can see that certain industry sectors can be hot and cold as well just as capitalization (e.g. small cap and large caps) trend up and down.

One criteria you can examine is P/E ratios. When P/Es are low many, not all, believe this is a prime time to begin investing. For example, large cap stocks right now are at very low PEs and small cap stocks are at a very high level of PEs. Many, not all, are dumping their small-caps and getting into large caps. Now this does not necessarily make it true until the shoe drops and you can see that a trend is occurring, but market timing is impossible. Do some homework on some indexes like the Russell 2000 or the S&P 500 and find out if this is true or just buzz. Now remember a long-term investor needs to be exposed to diversified investments so unless you are a gambler you should not exit a low-trending industry sector of capitalization. But if you believe a trend is happening or about to you might want to weight your portfolio heavier on what you think will trend up and go lighter on what industry sectors, capitalizations, etc. you think might go down--while remaining diversified.

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