Don't try to time the market

MANY FINANCIAL pundits like to predict what the market will do in the near future and urge you to buy or sell "now." But no one can consistently know what the market will do in the short term. In the long term, the trend is clear: The market rises.

In a famous study, University of Michigan finance professor H. Nejat Seyhun found that an investment held in the stock market from 1926 through 2004 would have delivered an average annual return of 10.4 percent, turning $1 into $1,919. But he also found that if you were out of the market (i.e. not invested in it) for its 12 best-performing months, your average annual return would be only 7 percent. If you sat out the 48 best months, you'd be down to a mere 2.7 percent, turning your dollar into $6.46. Miss just the 10 worst days and your annual average jumps to 12.8 percent.

Market timing also can be expensive. Getting in and out of investments frequently can leave you with short-term capital gains (if you're lucky to have avoided losses) that are typically taxed at a higher rate than long-term gains. Frequent trading can generate lots of commission fees, too.