| Tips on Investing:
Setting Your Goals
Having clear and defined goals is essential to successful investing.
These are some of the questions you need to answer before investing. Are
you investing in the short-term or long term? How much money do you have
to invest? How much money will you need in the future? (For college
education, a home, a car, vacations, retirement, etc.) How much money
are you able to invest without changing your lifestyle? How much of a
return do you reasonable expect from your investment? How risk tolerant
are you? (Your risk tolerance indicates your willingness, or
unwillingness, to lose your investment. If your are risk tolerant, you
are more accepting of losing part or all of your investment.)
Research is Essential
The more information you can get, the better. Look at company
information (annual reports, prospectus, etc.), newspapers, magazines,
television, the Internet, etc. Also, contact a professional broker with
any questions you may have. However, be cautious of information received
from "experts" from chat-rooms. This information is rarely reliable.
Take time to learn about the companies you may be interest in investing
with. Visit their web sites and read their annual reports. Understand
what industry they are in, how has their past performance been and where
are they headed in the future. What are their growth patterns like? Do
they have steady growth patterns or are they cyclical? Do they follow
the growth patterns of their competitors and their industry? How is the
industry performing? Is the company’s growth through sales, acquisition
of companies or increased market share? How do they make money?
Diversify your Portfolio
It is better to have different types of investments in your portfolio to
decrease your investment risk. It’s a good idea to have 15-20 different
stocks from 5 to 10 different industries in your portfolio. Also include
several different types of mutual funds, (i.e. growth and income, small
cap, equity income, emerging markets). Select your bonds based upon the
amount of risk you are willing to take. Various types of bonds include:
corporate A-Rated, US government, short investment grade, and general
municipal. You should also keep about 10% of your portfolio in cash.
Other investment you may want to include in your portfolio are IRA’s,
401(k) Plans, savings accounts, money market funds, REITs, and insurance
funds.
Stock Screens:
A stock screen is a check-list to help you establish a
set of criteria for the stocks you may want to invest in. Listed are a
few criteria you can use to narrow down your stock choices.
- Investment Objective
- Time frame - When do you need the money?
How much money will you need at the end of the investment
period?
Set a price level (Example: only accept a stock that has
a price of $30 or less)
Do you want to be paid dividends or do you prefer capital
appreciation?
This is best used if you want income growth, not capital
gains.
Do you prefer Blue Chip or Small Cap stocks?
- P/E Ratio (Price per Earnings Ratio)
Best if you use current price/forecasted EPS (Earnings
per Share).
Do your require a high or low P/E Ratio?
- Relationship of current price to the 52-week high
and low
Do you want to invest in the stock when it's near the
52-week low or 52-week high?
How well do you want to know the company?
Do you have a preference about which exchange the company
is listed on? |
|
Investment Strategies
When selecting an investment strategy, keep in mind your investment
objective, current financial position and risk tolerance. The discipline
and research required to develop your long-term investment plan will
help you avoid the risks associated with the desire of a quick profit.
This strategy is exactly what is says, you buy and hold
the investments in your portfolio for a long period of time.
Historically, the stock market has moved upward, increasing in value
over time. The buy and hold strategy puts you in a position to profit
from the long-term upward trend of the stock market. Selecting
investments to buy and hold can sometimes be tricky. You need to look
for industry leaders, companies with financial strength, and companies
who are increasing their market share, which ensures long-term growth.
This strategy is also a long-term strategy where you
invest the same amount of money in stocks, mutual funds, bonds, etc. at
regular time intervals (i.e. monthly, quarterly, or yearly), regardless
of the price of the investment. When the price of the investment
decreases, you are able to buy more with your fixed amount of money.
Conversely, when the price of the investment increases, you are able to
buy less with your fixed amount of money. The advantage is you are
buying fewer shares at a higher price and more shares at a lower price,
thereby making a larger profit due to the historical tendency of the
markets to increase over time.
This strategy involves maintaining a fixed dollar amount
of a portfolio in stocks, mutual funds, bonds, cash, etc. in your
portfolio. For example, if the price of a stock were to increase, you
would sell enough shares to bring you back to your original fixed dollar
amount. However, if the price of the stock were to decrease, you would
need to buy enough shares to bring you back up to the original fixed
dollar amount. This strategy forces you to take the gains when a stock’s
price rises. An investor has a tendency to buy when the stock price is
increasing, or when a stock has reached a peak. Conversely, when a
stock’s price falls, you must purchase more stocks, which increases your
purchasing power and lowers the overall average cost of the shares in
your portfolio. |
Risks Associated with Investing
What are the risks?
These are just some the of risks associate with investing
in the stock market:
This is the biggest risk you face. This is the part or
total loss the money you used for your investments.
The company whose stock you invested in may not be able
to generate sales or may not be able to grow and compete with
competitors. This may result in the price of the stock falling, or the
business may even fail, leaving the stock worthless.
- Non-Diversification (Unsystematic Risk)
This is the "putting all your eggs in one basket" theory.
This occurs when you purchase only one stock for your portfolio. If the
stock falls 40%, then you have lost 40% of your investment.
When you are ready to sell your position in a security,
there may be too few investors willing to purchase your position. This
could result in high transaction fees which would lower your expected
return or increase your expected loss.
This risk affects all fixed income securities (preferred
stocks, bonds, CDs, etc.). If your purchase a fixed security, your risk
is when the interest rates rise shortly after your purchase. The
increase in interest rates would lower the value of your security. The
price of your lower-yield security would fall.
Also known as Market Risk, this is the risk associate
with the movements in the overall market. If the overall market
declines, as it did in October 1987, the value of your portfolio would
also decline.
The purchasing power of your money decrease with
inflation.
Changes in the tax laws for dividend income and capital
gains could change the demand for these types of investments. |
|
