|
|
Diversity Investment GroupPrinciples of Successful Long-Term Investing |
By Angele McQuade
BetterInvesting
magazine, February, 2006
Learning to invest is really just the process of studying and then applying simple principles from trusted sources. It doesn't have to be difficult or confusing to work its magic in your financial life. Find the resources that make sense to you. Study what they offer. Put that knowledge into action, over and over again. Principle by principle, you'll soon find yourself the master of your investment portfolio and an inspiration to those who hope to someday learn what you now know.
You don't have to be rich to invest. Even modest investments can grow to become substantial wealth when made consistently over many years.
All that learning to invest requires is a willingness of spirit, an open mind and a little bit of effort. If you have even a minimal amount of money and the motivation to stretch your knowledge, the only thing holding you back from investment success is your own hesitation.
Focus on getting rich slowly.
Slow and steady progress toward your financial goals may not be as exciting as trading in and out of the stock market, but are you looking for excitement or a secure financial future?
Spend less than you earn, then save and invest the difference. While it's true that investing is important to your long-term financial security, it's even more important to develop healthy financial habits that will serve you for a lifetime.
Growth stocks are those with sales and earnings growth that outperforms the economy and inflation and, quite often, other companies in the marketplace. Investors expect these stocks to increase in value as the earnings increase.
Pay off your high-interest debt before investing extra money in stocks or mutual funds, where the return may be lower than your interest rate. Once you're done paying off those lenders, direct that money toward fulfilling your financial goals through investing.
The past is never a guarantee of the future. Still, past results give a good indication of what might happen in the next few years and provide a reasonable basis for predicting future earnings.
To achieve consistent overall returns, you'll need to invest in quality growth stocks and mutual funds regularly through both bull and bear markets.
Achieve an average 14.9- percent annual return and your investment portfolio will double every five years. You can still prosper even if your return is lower than this if you're committed to investing in quality growth stocks over the long term.
Risk and reward go hand in hand. As investment risk goes down, so does the potential return.
Don't keep all your eggs in one basket or all your money in one stock. Diversify by choosing the stocks in your portfolio from a variety of industries and company sizes. If you're not committed to your financial goals, you're probably not going to be willing to make any difficult choices required to fulfill them.
The value of stocks has increased an average of more than 11 percent a year for the past 76 years, even with years of underperformance. If you research investments carefully and invest wisely over the long term, investing is a proven and powerful way to increase your wealth.
Be wary of financial advisers who push you toward investments you're not comfortable with or who don't seem to be listening to what you say. Good advisers will offer the guidance you need or are asking for, not push their own agendas.
When investing in mutual funds, choose quality, low-cost fund families whenever possible. Your investment dollars will go further when you're paying less in management fees and fund expenses.
Take the long-term view of investing. Few people amass fortunes by trading stocks.
Sticking to one set of solid, basic principles will yield better results than constantly switching course and chasing the latest flavor-of-the-month investment idea.
Prioritize your financial goals.
If you don't identify what you hope to accomplish, you may lose enthusiasm with your investment education if at times it becomes a little harder than you expected.
Invest a set sum of money regularly over your lifetime, regardless of what the stock market is doing.
By dollar-cost averaging -- investing a fixed amount of money on a regular schedule -- you automatically buy more shares when a stock price is lower and fewer when the stock price is higher, resulting in a lower average purchase price and a higher overall return.
Market booms, recessions, depressions and recoveries are all parts of the stock market cycle. Once you recognize the rhythm of these market phases, you'll no longer be distracted by the volatility.
There's no such thing as a risk-free investment. Even money deposited in a federally insured bank savings account bears the risk of inflation rising faster than its interest rate.
The larger your portfolio grows, the more important portfolio management becomes. When your portfolio reaches that level, spend more time making decisions about your portfolio as a whole than on the relatively small percentage that any new investment will represent.
Invest in quality growth stocks -- those increasing their revenues and earnings faster than the overall economy and inflation combined -- and mutual funds focusing on those types of stocks.
Combining data from different sources in a single stock study can lead to problems. Avoid doing this unless you thoroughly understand the differences and feel comfortable making any adjustments necessary.
Growth investors pay $1 for a stock they judge will be worth $2 in the future. Value investors pay $1 for a stock they judge no one else realizes is worth $2 today.
Reality matters. Painting too bright a picture in your stock analysis won't help your bottom line when the investment finally shows its true, drab colors.
The price-earnings (P/E) ratio -- one way to determine whether a stock is fairly valued -- is simply the stock price divided by earnings per share. It represents the dollar amount that investors are willing to pay for each dollar of earnings the company produces.
Good judgment comes with time and experience. A careful study of historical sales and earnings growth rates will give you an important foundation on which to base your forecast of future growth.
Not every investor needs a financial adviser. Trust yourself, reach out for help when warranted and continue developing the confidence it takes to become a self-dependent investor. The more you learn, the less you'll need to rely on someone else's advice.
When considering whether to buy more of one of the stocks you already own, choose the stock with the brightest prospects to give your portfolio even brighter prospects. Another way to improve your portfolio is to replace existing stocks you own with ones that offer equal or better growth and higher potential for return.
A company's earnings and sales don't usually grow at the same rate. Earnings may grow more slowly in times of increased competition or out-of-control costs.
Even stable or increasing trends of profit margins and return on equity aren't good enough if they still fall below the industry averages.
When a stock begins missing your growth targets or shows deteriorating fundamentals for more than one quarter, immediately do whatever analysis is necessary to decide whether a sale is in order. When a company's growth stalls or, even worse, starts to decline, it's likely time to get out and find a more worthy investment.
Compounded annual growth shows the rate at which a company grows each year while taking into account the growth from the year before.
Even the best-quality growth stock will be a lackluster investment if you pay too high a price for it. The judgment you apply when analyzing a stock can mean the difference between reaching your financial goals and losing your money completely.
Above-average and steadily increasing profit margins are a good sign that company management can successfully balance the tasks of increasing sales and decreasing or containing costs.
A rising P/E ratio may show investor optimism based on solid fundamentals, but it may just as easily be a sign of unfounded enthusiasm for a company selling at unrealistic, unsustainable levels.
For sustained company performance, nothing beats great management -- executives who balance business pressures while bringing their companies to ever-increasing results.
If profit margins and return on equity aren't consistently above-average, move on to your next prospect. Don't bother with calculating a reasonable purchase price -- this isn't a reasonable investment to consider.
If the price of a stock in your portfolio falls or stays stagnant, check to see whether the company's fundamentals are still strong. If so, this may be a signal to add to your holding.
Earnings that increase consistently each year are a sign of quality management that can keep a company performing well through both trouble-free and challenging periods.
Falling interest rates tend to push stock prices higher. The lower rates stimulate business, and the higher returns on stocks become more attractive than lower-yielding interest-paying investments.
With diversification, it's possible to have too much of a good thing. You need only 15 to 25 companies of different sizes from at least 10 unrelated industries to reduce the risk in your portfolio. Any more than that and your risk comes from not being able to follow them all.
Falling in love with a company's story can be dangerous when its financials tell an entirely different tale. You'll improve your personal profits more by recognizing a company's weaknesses than by trying to explain them away.
Investing is fun! The research involved in analyzing a stock or mutual fund can be as rewarding as any other hobby you enjoy -- and probably far more profitable.
If you have questions or comments, write to: DIGnet@mindspring.com.
Return to Home Page of Diversity Investment Group
Diversity Investment Group | Atlanta, Georgia, USA | DIGnet@mindspring.com