Buying stock is easy. The challenging part is choosing companies that consistently beat the market.
That’s something most people can’t do, which is why investing in a diversified mix of low-cost index funds and exchange-traded funds is a smart long-term strategy for the average investor. So smart that even diehard stock jocks swear by indexing for the money they’re not using to buy individual equities. But you’re reading this to get better at investing in stocks. We’ll assume you’ve got a yen for research, time to let your investments ride through many market cycles and have set parameters for the amount of money you’ll put on the line. (We recommend no more than 10% of your overall holdings be invested in individual stocks.) And let’s not forget this vitally important investing PSA: “Money you need in the next five years should not be invested in stocks.” Here are five investing habits essential for success in the stock market: · Check your emotions at the door. · Pick companies, not ticker symbols. · Plan ahead for panicky times. · Build up your positions with a minimum of risk. · Avoid trading overactivity. 1. Check your emotions at the door “Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing.” That’s wisdom from Warren Buffett, chairman of Berkshire Hathaway, oft-quoted investing sage and role model for investors seeking long-term, market-beating, wealth-building returns. Buffett is referring to investors who let their heads, not their guts, drive their investing decisions. In fact, trading overactivity triggered by emotions is one of the most common ways investors hurt their own portfolio returns. All the investing tips that follow can help investors cultivate the temperament required for long-term success. 2. Pick companies, not ticker symbols It’s easy to forget that behind the alphabet soup of stock quotes crawling along the bottom of every CNBC broadcast is an actual business. But don’t let stock picking become an abstract concept. Remember: Buying a share of a company’s stock makes you a part owner of that business. You’ll come across an overwhelming amount of information as you screen potential business partners. But it’s easier to home in on the right stuff when wearing a “business buyer” hat. You want to know how this company operates, its place in the overall industry, its competitors, its long-term prospects and whether it brings something new to the portfolio of businesses you already own. 3. Plan ahead for panicky times All investors are sometimes tempted to change their relationship statuses with their stocks. But making heat-of-the-moment decisions can lead to the classic investing gaffe: buying high and selling low. Here’s where journaling helps. (That’s right, investor: journaling. Chamomile tea is a nice touch, but it’s completely optional.) Write down what makes every stock in your portfolio worthy of a commitment and, while your head is clear, the circumstances that would justify a breakup. For example: Why I’m buying: Spell out what you find attractive about the company and the opportunity you see for the future. What are your expectations? What metrics matter most and what milestones will you use to judge the company’s progress? Catalog the potential pitfalls and mark which ones would be game-changers and which would be signs of a temporary setback. What would make me sell: Sometimes there are good reasons to split up. For this part of your journal, compose an investing prenup that spells out what would drive you to sell the stock. We’re not talking about stock price movement, especially not short term, but fundamental changes to the business that affect its ability to grow over the long term. Some examples: The company loses a major customer, the CEO’s successor starts taking the business in a different direction, a major viable competitor emerges, or your investing thesis doesn’t pan out after a reasonable period of time. 4. Build up positions gradually Time, not timing, is an investor’s superpower. The most successful investors buy businesses because they expect to be rewarded — via share price appreciation, dividends, etc. — over years or even decades. That means you can take your time in buying, too. Here are three buying strategies that reduce your exposure to price volatility: Dollar-cost average: This sounds complicated, but it’s not. Dollar-cost averaging means investing a set amount of money at regular intervals, such as once per week or month. That set amount buys more shares when the stock price goes down and fewer shares when it rises, but overall, it evens out the average price you pay. Some online brokerage firms let investors set up an automated investing schedule. Buy in thirds: Like dollar-cost averaging, “buying in thirds” helps you avoid the morale-crushing experience of bumpy results right out of the gate. Divide the amount you want to invest by three and then, as the name implies, pick three separate points to buy shares. These can be at regular intervals (e.g., monthly or quarterly) or based on performance or company events. For example, you might buy shares before a product is released and put the next third of your money into play if it’s a hit — or divert the remaining money elsewhere if it’s not. Buy “the basket”: Can’t decide which of the companies in a particular industry will be the long-term winner? Buy ’em all! Buying a basket of stocks takes the pressure off picking “the one.” Having a stake in all the players that pass muster in your analysis means you won’t miss out if one takes off, and you can use gains from that winner to offset any losses. This strategy will also help you identify which company is “the one” so you can double down on your position if desired. 5. Avoid trading overactivity Checking in on your stocks once per quarter — such as when you receive quarterly reports — is plenty. But it’s hard not to keep a constant eye on the scoreboard. This can lead to overreacting to short-term events, focusing on share price instead of company value, and feeling like you need to do something when no action is warranted. When one of your stocks experiences a sharp price movement find out what triggered the event. Is your stock the victim of collateral damage from the market responding to an unrelated event? Has something changed in the underlying business of the company? Is it something that meaningfully affects your long-term outlook? Rarely is short-term noise (blaring headlines, temporary price fluctuations) relevant to how a well-chosen company performs over the long term. It’s how investors react to the noise that really matters. Here’s where that rational voice from calmer times — your investing journal — can serve as a guide to sticking it out during the inevitable ups and downs that come with investing in stocks. According to David Fabian, “A vital part of Investment success depends upon one’s ability to compare historical returns with an index or benchmark. Doing so will let you measure if your approach meets the performance expectations or evaluate the efficiency of somebody else’s recommendation prior to hiring them. Although is may be very common in the entire industry, many investors still make knee-jerk conclusions based on unreliable or biased information. Two primary conditions that must be satisfied when determining the viability of any investment approach are discussed below: A proper standard of evaluation We now lay down the reasons why these concepts are essential to your decision process. Let us talk about time. In reality, time is a commodity that has lost its overarching value in the fast-evolving dynamics of our daily existence. People so often fall prey to the temptation of immediate gratification provided by modern technology that they totally overlook how much time is required to accumulate wealth through the process of compounding. For instance, if you start saving and investing starting at your mid-20’s and then you retire in your mid-60, it would have taken you 40 years to accumulate your wealth. But it does not end there. You need to sustain your wealth’s security for another 20 years through managing and conserving your investable assets. The growth period alone will take 480 months or 40 years, while the distribution or income period could last for 240 months or 20 years more. You need enough patience to see it through. You cannot simply compare returns over very short time-durations. That is why you can hear people cry: My portfolio has been stagnant in four months! I’m below the benchmark on a 6-month rack record! Alas, my portfolio is 250 basis points lagging from the S&P 500 this year – I am done for! The truth is that even the most efficient investment method will suffer some setbacks through underperformance. It may take some months or even last for a couple of years or more at a time. The best step to take during such doubt-filled or self-pitying moments is to recall why you chose this strategy in the first place. Is your investment strategy still consistent with your risk tolerance level? Could there be an intervening and temporary factor that is causing the adverse conditions? Can you do something to manage this factor in order to enhance your long-term returns? Have you really considered the risks of shifting to another approach in mid-stream? Experts would advise that you analyze the performance of any investment method over a period of 3 to 5 years, enough time to determine the strengths and weaknesses over several conditions of the markets (bear, bull, transitional, and others). The bond or stock markets can proceed for a few years along a particular direction. While that may favor some investors, it can also hurt others. Not that either side is bad investing; it all has to do with each group being exposed to different risks. Creating and protecting your wealth is not a 100-meter dash -- a short-distance race, so to speak. Rather, it is a marathon -- a sustained race where risk conditions must be considered at close-range and behavioral principles applied with accuracy. Great patience is, therefore, of utmost importance in order to succeed as an investor. There are no short-cuts in this industry. A Suitable Benchmark A common pitfall among investors is the tendency to compare apples and oranges. A prime example is that of a company whose primary approach is to have a mix of bonds and stocks allocated through ETFs that are adjusted according to meticulously-developed strategies. As such, it has a total of 20 to 40% stocks and 50 to 70% bonds in the Strategic Income Portfolio at any particular period. However, the most common feedback the company derives when evaluating performance is how its portfolio stacks up against the S&P 500 Index. It seems that people are programmed to think that the S&P is the singlular reliable benchmark available, such that it has become the darling standard of many index lovers throughout the world. Obviously, there is no basic logic to comparing the returns of a 100% stock portfolio (the S&P 500) versus a multi-asset portfolio that contains less than 50% exposure in stocks. A better and more suitable benchmark for such a type of investing method would be the 40/60 allocation in the iShares Core Moderate Allocation ETF (AOM). That is where the data will exhibit a clearer picture of actual performance. In a similar manner, comparing the 0 to 60 mph rate of starting acceleration of a Porsche in a few seconds to that of a Suburban would not make sense either, would it? Although that is an accepted truth, in general, only a few investors consistently apply that universal principle in their investment practices. It is vital to appreciate that fundamental concept in the process of accurately measuring risks or comparing similar approaches. Never compare investing in bonds and stocks to the revenues of a CD or a money market account. Never relate a portfolio of technology stocks to closed-end funds. And never compare hedge-fund revenues to that of a bunch of ETFs. We can continue down the line. . . . Perhaps, the most difficult hurdle to making this logical conclusion is the fact that most investors do not know the suitable benchmark for comparison objectives or where to locate them. They merely gravitate to the S&P 500, the NASDAQ Composite or the Dow Jones Industrial Average because they see them flashed on the news or on the web daily. In the end, every particular asset type or investment instrument should be weighed or evaluated by a similar group of equals. ETFs have made that process less difficult for many years now; however, you must always undertake the task of finding an appropriate index to serve as a benchmark. Ask a professional analyst how and where to find a good benchmark as a reliable yardstick. The Ultimate Goal Investing involves a lot of psychology and comprehension of the relationship of certain facts and information. This article hopes to develop a new perspective not considered previously or to strengthen an existing point-of-view. It is hoped that either way, the reader will attain a more reliable and more solid frame of reference for evaluating a portfolio’s performance in the future. As early as you can, avoid common mistakes so you can enhance your retirement savings without losing precious time.
Saving for your retirement while you are in your early twenties can be one of the wisest financial decisions you can make. This is proven by the fact that starting in your 20’s can help you gain hundreds of thousands of dollars more than if waited until you are in your 40’s. Nevertheless, deciding to save money may not always be a sure path toward financial success. You must be aware of certain errors most people are prone to commit along the way and which you must avoid in order to safeguard your future. Along with saving for retirement, you need to enhance your financial intelligence on the path to a secure future. So, even without consulting with a financial adviser and assessing your situation, these following tips will give you some general and practical advice on avoiding the common mistakes in saving for retirement. #1: Too Much Caution so Early in the Game Striking a healthy balance between caution and eagerness helps a lot; hence, do not be too cautious early in your plan. Starting at the age of 25 is ideal, as most experts say, gives you about 30 or 35 years prior to using your retirement savings. With still plenty of time in your hand, you can have the luxury of taking some chances instead of being too cautious. And so, investing into one or two big investments that early on in your career can provide substantial revenues within a long-term investment time-frame. On the other hand, you may go to the other extreme and take the extremely conservative approach, which may prevent huge losses but also keep you from significant returns. #2: No Diversification Avoid also the mistake of putting all your eggs into one basket, or into one asset type. Let us consider the stock market. Assuming you put your whole retirement portfolio into stocks and you gained a massive $1 million return over the years. At 59, with one year remaining until your planned retirement, the market suddenly falls and suffers losses of 40% and eating away $400,000 off the stock value. It would take short of a miracle to recover that huge loss within one year! The solution is to diversify. Balance your savings and choose more conservative investments in the few remaining years of your career. #3: Neglecting to Consider Fees Majority of people make the mistake of not taking the time to study the fees connected with retirement savings. One percentage point increment in fees could mean costs of up to tens of thousands of dollars over the entire duration of an account. Analyze fees like a bee searching for honey and avoid entering into an account without a thorough picture of the fees required. #4: Aimlessly Moving On Setting up retirement goals at the start beats having to proceed aimlessly, even though life is unpredictable and you will always experience such situations as salary reduction or other external economic factors. Having exact amounts to aim for and deciding when you need to enter into new investments will help you easily manage your finances, since you know where you are exactly at the scoreboard and how much time you have left. #5: Avail of Tax Breaks when Filing How to manage taxes well forms a big part in a successful retirement planning. Certain accounts will give you the option to defer tax payments until maturity, allowing your money to grow more with interest. Others demand that you pay post-tax payments, freeing you from having to pay when you withdraw the money. To know more on this matter, consult with a financial adviser to decipher the pros and cons of either of the two schemes. Be Wise: Plan Right and Avoid Retirement Mistakes The wise always plan ahead, enhancing the likelihood of securing a secure and comfortable retirement with sufficient money to support their needs over the coming golden years. The key is to avoid those mistakes that erode your portfolio’s full potential or stunt its growth. Commit yourself to these proven guidelines and rest easy knowing a bright future awaits you. You must have taken a peek at this year’s billionaires who made it to the top of the list of those who added fortunes to their wealth. How many billions did they gain over the previous year’s figures? Most investors think that having a high debt is undesirable and must be avoided. Naturally, they tend to see it as adding more risks to a company’s present exposures. And once that company defaults on its debts because of underperformance, it could fold up. Nevertheless, high debt can lead to positive consequences. It can bring in greater returns, even offsetting the greater risks involved in the process. Enhancing yields The major reason why debt can improve overall returns is because it costs much less than equity. A firm can raise capital either through equity or debt, with debt generally offering a less expensive option. Hence, maximizing a company’s debt levels in order to generate higher returns on equity is more logical. It can lead to greater profitability, stronger share-price performance and increased dividend growth. The proper circumstances Admittedly, maxing out a company’s debt levels is not a wise move at all times. Businesses with highly seasonal performance and dependent upon the conditions of the general economic environment might encounter great difficulties if their balance sheets are heavily leveraged. During times of low returns, they may not be able to undertake debt-servicing steps, aggravating the company’s situation. On the other hand, companies performing in sectors that offer strong, consistent and viable revenues should increase debt to comparatively higher levels to enhance the gains for their equity-holders. For instance, it is to the advantage of utility and tobacco firms to raise their debt levels because of their high level of earnings visibility and the relatively strong demand for their products. Economic periods During periods of low interest rates, it certainly makes sense for businesses to borrow as much as possible. The previous ten years provided such an opportune time to borrow, rather than to lend. Global interest rates have experienced such record lows, thus, leading many companies in various sectors to decrease their overall borrowing rates. In the future, a higher rate of inflation is expected, portending higher interest rates. Although it could lead to increases in the cost of servicing debt, it should be compensated somehow by higher prices passed on to the end consumer. Moreover, a higher inflation rate will serve to diminish the real-terms value of debt. This can lead to increased levels of borrowing in the future. Conclusion Although increasing debt levels can also increase overall risk, it can be a viable step under the proper conditions. During periods of low interest rates, businesses with strong business models may enhance overall revenues by raising debt levels. And while higher interest rates may entail rising costs of servicing debt in the future, higher inflation may reduce the real-terms value of debts. Hence, investors can opt to buy stocks with a modest degree of debt exposure to optimize their overall gains over the long-term. What is the difference between investing money and saving money? Although they seem to be similar, they mean entirely different things. Knowing the difference and applying that knowledge can help you build your personal wealth. So many novice investors do not realize the fact that the two have different uses and have distinctive roles in their financial approach and balance sheet. As you begin the adventure of enhancing your wealth and establishing financial freedom, learn how to avoid problems by properly dividing and allocating your money. A lot of individuals, in spite of having great portfolios, lost everything for not having given sufficient respect to cash in their portfolio. Cash has exceedingly greater use than merely for making more cash. To appreciate the use of cash, let us see how investing and saving differ. Defining what Saving Money Means The idea saving money involves keeping hard, cold cash in a secure place, as well in liquid (that is, easy to access or sell in a matter of days) assets. This includes checking accounts and guaranteed savings accounts. You can also include U.S. Treasury bills or money market accounts, although the latter involves a lot of monitoring work. Most of all, your cash funds should always be ready to use for your needs; available at any time for immediate withdrawal with the least delay under any circumstances. Most rich and famous investors, including veteran investors who went through the Great Depression, strongly recommend hiding plenty of cash in secret storages even if that will incur a big expense in terms of profit loss. Although the papers did not carry the news, back in the 2008-2009 market collapse, some hedge fund managers were apparently asking their spouses to withdraw as much cash as possible from ATMs, expecting the whole economy to collapse and limiting the availability of greenbacks for a short period.. After you have ascertained the preservation of your capital should you consider secondary measures for money you have kept in savings. That is, hedging against inflation. Defining What Investing Money Means Investing money involves using your money or capital to acquire an asset with the potential of producing a safe and reasonable rate of return, allowing you to build wealth even through volatile periods, which can run into years. Genuine investments have a certain factor of safety, usually in the form of assets or owner returns. From your basic lesson in novice investing, the most productive investments are such assets as bonds, stocks and real estate. What is the Desirable Ratio between Savings and Investments? As a rule, saving money should generally take precedence over investing money. Consider it as the foundation over which you will erect your financial house. For a very simple reason: Unless you have inherited a sizeable amount of wealth, your savings alone will generate the capital to support your investments. During the lean periods when you will need cash, chances are you will have to sell your investments at the most inopportune time. Such an event would set you back by a big stretch. Two major kinds of savings strategies should become part of your financial concern. They are: · As usually recommended by experts, your savings should be enough to address all your personal needs, such as food, mortgage, utility bills, loan payments, insurance costs and clothing expenses for a period of six months. Hence, in case you lose your job, you still have enough time to cope with the crisis without the daily stress of working for a regular salary. · Whatever specific goal in your life that will demand a big amount of cash for at least 5 years should be powered by savings, not by investments. In the short-term run, the stock market can be considerably volatile, taking away 50% of its value within a year. Buying a house can be a prime example for saving your money in real estate instead of investing it. With these things under your belt, you can acquire health insurance as your first line of defense in your portfolio. One possible exception is contributing to a 401(k) plan at your company in order to get free money from your employer’s matching contributions. That is on top of getting a large tax break for contributing to your retirement account. You also have material bankruptcy safeguards for assets held within such an account against any non-payment or default on your part. Additional Info on Saving Money Avail of more information on how you can start saving money by reading online materials for beginners on how to save money. Get hold of resources, articles, essays, and lessons teaching you how to save money, how to invest money and how to build your personal wealth. It may seem scary for now, but remember that even successful and rich people began by earning money, living within their means, saving money and investing in ventures that brought interest, dividends or rentals. You can be as good, if not better, than they are. It is all a matter of gaining the same knowledge and wisdom to allow you to act as prudently in handling your money with discipline in order to reap a certain measure of success. In the same way that they did their homework and applied the right principles of money management, saving your own money can be as simple as adding 1 and 1 to get 2. |