Investing is like gardening—plant seeds, water, cut blooms and remove weeds. Some of the plants flourish, some die. Investing, like flowers, can’t be successful unless a seed is planted. If a weed grows, like a poor investment choice, it needs to be removed.
The media routinely profiles someone who has evolved with a rags-to-riches story. Sometimes, there will be a story of how a simple, uneducated person spent his life as a bus driver and donates a million dollars to the local college. It happens. The question becomes, how could he do it when he makes so little in comparison to what others make?
The answer is fairly simple. He saved a portion of his money and invested it over a period of time. His investments were in companies and products he understood and could get information on. That’s the secret! Nothing ground breaking or earth shattering.
If you are a member of a professional association, imagine attending your annual professional conference and entering the Exhibit Hall. Some are huge with hundreds of vendors displaying their goods; others small. It doesn’t matter—there are riches in those aisles. Ask: What’s the buzz about? Who makes it? Can you buy stock in the company?
Or, think about your work place. What products are used? Which ones are used a lot? Which do your colleagues think are good (and not so good)? Who makes them? Can you buy stock in the companies?
Now, switch to your home. Ask the same questions.
Over the holidays, I was in one of those mega-malls. The line to buy “stuff” stretched outside the Apple Computer store. No one needed a high IQ to know that Apple was making, and selling, things that people wanted. I counted over 50 people in line—iPODs and all the goodies that are designed for the line had propelled Apple Computer to the head of the stock market investment class. An increase of over 130 percent in stock appreciation over 2005 was enjoyed by the average Apple shareholder. Not bad.
As you start on your investing path, here are a few rules for your journey:
• Never put all your money in one thing—this means you don’t invest all of your money in just one stock, one mutual fund, one piece of real estate, one bond, one business, etc. Diversify, diversify, diversify.
• Invest (as in savings) on a regular basis. By investing regularly, you will never pay top, or bottom, dollar for anything. It averages out.
• Know what your financial and emotion tolerance for risk is. If reaching your goal allows you several years of investing, you can usually undertake more risk. If your goals are short term or you need money within a few years, your risk level should be low. A Money $mart rule is that the higher the potential return, the greater the degree of risk; the lower the potential return, the less risk.
• Do your homework. Don’t invest money because your friend is. The best investments are companies that make products that you know of, use and/or understand. Sometimes, weird things do very well. Sometimes they don’t.
• Select investments you understand. Can you explain it to others (how about yourself)? Can you sleep at night? Invest in areas, concepts, and products that you understand. There’s lots of choices out there—why go with something that feels alien?
• Don’t panic when bad news hits. If you invest in the stock market, there are days, weeks, months, even years that your holdings may not appreciate much, or could depreciate in value. Over all, though, the stock market has outperformed other investments for the long haul.
• Set specific goals, both on the upside and on the downside. When you hit your objective, re-evaluate. What profit would you like—50% increase in three years? 100%?
If your investment reaches your goal within the timeframe—you have some decisions to make—sell, hold, maybe buy more. Would you buy more of it at the current price? If not, sell at least half of and reinvest your profits somewhere else.
Always set a floor to how low you will tolerate an investment declining to. What’s your comfort level? How much will you let your investment decline in value before you declare it over? Set that “floor price” at the time you r first invest in the stock. If it drops below your price, sell it. No exceptions.
Too many investors hold onto their investments, hoping (and praying) they will eventually climb back to the price it was originally purchased at. Take your loss and move on. Yes, I know it may come back . . . but it could take years and there are no guarantees.
Uncle Sam helps pay for the loss by allowing you to deduct up to $3,000 per year in losses. If your tax bracket is 25 percent, it means that the government will absorb $750 with a reduction to your tax bill. Take your marbles and find another game.
• Trust yourself. You have the smarts and savvy to make decisions about investments. Annually, a staffer at The Wall Street Journal throws darts at the stock quotation pages. The dart selections are then compared at year-end with the selections of a panel of experts. More times than not, the darts win out. So can you!
• Averaging puts you ahead. Dollar cost averaging (DCA) is the process of making a regular investment in a stock or mutual fund of a fixed amount of money at a specific or regular time.
When you buy mutual funds, it is common to continue to put more money in the fund as long as you own it. You do it by reinvesting gains and dividends and adding additional money. When you buy stocks, many companies allow you to reinvest any dividends paid in more stock at whatever the current price is. And, some will allow you to make direct investments for fractional shares as long as it’s done through the company.
Successful investors practice the art of DCA. Let’s say you invest $100 in your favorite fund on the 10th of each month. Today the cost is $15 per share. Last month it was $14.50, and the month before, $13. By averaging the three prices, your actual cost is $14.17 per share ($15+14.50+13=$42.50; $42.50/3=$14.17). Not the lowest price—but never the highest either.
• Make automatic payments. If you commit to an automatic monthly investment program, you can purchase a mutual fund for as low as $100 per month as an adult (sometimes less for kids).
• Start an investment club. Contact the National Association of Investors Corporation 856.988.6560 or www.better-investing.org to get information –it’s a great way to learn about investing with a minimal amount of your own funds.
• Take enough risk. There’s all kinds of risk—your age, health, taxes, inflation/deflation, emotional, even wealth. If you have health issues that may require immediate money; age issues that may require money needed for assisted type living arrangements; money owed for a large tax gain; a minimal sized nest egg; or not sure if the economy is deflating or inflating, and feel fearful that you will lose your money or be wiped out, your investments will be effected. Your risk factor is low.
• Avoid hot tips. They are merely that—hot and can cool off in a nano-second.
Your Final Tip
When you do any investing, don’t buy and then forget what you have. Both stocks and mutual fund investments need to be monitored. If you hit your objectives (an increase in value)—you need to reassess your holdings. Do you think it will continue to increase? Stay at the same level? Not sure? Decline?
If you think it will continue to increase—raise your price objective to a new level and continue to monitor.
If you are not sure—sell half and invest in another company and let the balance ride, but increase your price objective. Pay your taxes on the gain.
If you think it will stay at the same price level—why stay in it? If it’s paying a dividend, it might make sense to; if not, your money might work better someplace else. Pay taxes on gains if you sell.
If you believe it will decline—sell now and pay your taxes on the gain. Congratulations on your money smart investment strategy.
Profits are like the fruit on a tree. If you don’t pick them when they are ripe, they fall and rot. Anyone can invest. Being successful at it takes time to cultivate what you learn so that you can plow your profits back.
Take advantage of the plans that you have available to invest—be they an IRA, 403(b), 401(k), profit and/or pension plan, or any number of other vehicles available through your employment. Think slow and steady—over time, you will be incredibly profitable.