A handy indicator that tells you when to invest in the Stock Market:
Dividend Yield - S&P 500 Index 3.4% (as of 03-05-09)
1 Year Treasury Rate .62%
Implied Volatility 49.88%
Input these figures here. Make share price = 100, strike price = 108.16 (from the yield + real gnp + inflation above), and maturity = 1 year. Calulate theoretical option value, which in this case = 15.13. Since the spread between the estimated long term return and cost of the option is wide (15.13 - 8.16 = 6.97) the market is not currently a superior long term value
Economic Forecasts
Why this works
Because there is a risk-free way to invest in the stock market. Starting with your original amount to invest, put enough of it in an interest bearing account to guarantee that at the end of a period of earning interest (say, a year) you will have your original investment back. Then take whatever is left from the original amount that is not needed to earn interest and invest that in call options on the stock market. This works best with high interest rates and low option volatilities, because then you have more money to buy options and they cost less.
Individual Stocks
Most people do not have the psychological temperment to trade stocks, because they want to hold on to losing investments and get rid of winners.They also want to buy "cheap" stocks. Stocks that have fallen in price by more than the market (considering their 'beta") are not better buys - they have merely repriced themselves to reflect worsening conditions (this confuses people because normally when something falls in price it's more advantageous to buy). In contrast to individual stocks, when entire stock markets fall they are better buys.
Rules to Limit Investment Mistakes when Buying Individual Stocks
1. Buy only 100 shares of each stock. This limits how much you can buy of low priced stock, and also of very high priced stock, because you can't afford it.
2. Buy only companies with retained earnings on the balance sheet that are positive. Many companies are poor quality, and will never earn enough to have positive earnings, and will never pay off for their investors.
3. Buy only companies with positive cash flow from financing activities. These companies are self sufficient and do not need to go back into the public markets for new financing.
4. Sell when the stock is down 10%. Double up if the stock goes up 10%. Sell if it is up 50% and buy back 1/2 of the amount sold the next day. Repeat
Time is your friend
Your money will start working for you. Say you can afford to invest $1000 per year.Whatever your money earns with compounding, you can spend that much more on yourself and that much less for your usual $1000 per year investment. If you look at 401k plans that have been going a while for example, you can see that the investments in the plan earn a lot more than the annual contribution of the individual.
Savings
Don't forget about the "f-you" money (hopefully, around two years worth of rent or mortgage). After that you can invest without worrying.
Spending
Since a year's salary saved is worth two years leisure, you can compute how much each purchase you make is costing you in freedom: Hours of freedom lost = (Amount spent * 17,532 (the amount of hours in 2 years))/ Annual salary