It's not hard to find and buy good stocks, but it takes a lot of work and a disciplined approach.
A good friend recently told me his retirement savings strategy, and I use the word "strategy" loosely here. He was terrified of stocks, so he chose to put his savings in bank certificates of deposit.
He now has $40,000 in cash earning less than 2% interest, and at that rate will retire with, oh, about two years of spending money. But who can blame him for his fear of the market? The ups and downs of the past few years have wreaked havoc on nest eggs everywhere, and no one wants to get burned again.
But how to do it? How do you avoid the investing pitfalls yet still build that fat mountain of cash? One key step is confronting your fears about stocks and building the knowledge and confidence to invest. It will take work and you'll do it one baby step at a time, but soon enough your inner Buffett will lead the way.
1. Invest in what you know. A stock price is based not on past performance but on what investors think it will do. People expect big things from Apple (AAPL), whose price has hovered between $330 and $360 all year. Not so much with Wal-Mart (WMT), which has been stuck in the $50-$60 range for years.
You must know a stock so well that you can set your own expectations. Learn how to read stocks, and buy the ones you think will go up.
Another way is to get down and dirty with the numbers. Find the price-earning ratio not only for your stock but for others in the same industry. Same with the price-to-book ratio. Get the four most recent earnings reports from the company and read the transcripts of earnings calls on Seeking Alpha. Read analyst reports while you're at it. Become so intimate with a stock that you'll want to make it breakfast in the morning. It's hard work, but it's an absolute must.
2. Follow dividends. Dividends aren't that important for younger investors who have the luxury of time and can take on a little more risk. But as you get older, you start to like the comfort and stability of a solid dividend-paying stock. In fact, many investors aim to live off dividends when they retire.
A company with excess profit usually reinvests it in the business or pays it to shareholders through dividends. Get to know a dividend's yield, which tells you how much in dividends your stock is earning for you. Calculate it by dividing the annual dividend by the stock price. One of the best dividend stocks, Procter & Gamble (PG), has raised dividends for 54 years in a row, giving investors an annualized total return of 7.5%, according to the Dividend Growth Investor blog.
Other good dividend bets are PepsiCo (PEP), Kimberly-Clark (KMB), Abbott Laboratories (ABT), Walgreen (WAG) and Johnson & Johnson (JNJ).
3. Find a strategy and stick to it. I wasn't kidding about channeling your inner Buffett. One of the many reasons Warren Buffett is so adored is that he sticks to his investment philosophy through thick and thin.
Buffett all but ignores the stock market, calling it a popularity contest. What he likes to see are companies that can make money. He wants results. He recently said that if given the choice between all the gold in the world and all the farmland in the United States, he'd take the farmland because it produces and delivers returns.
Even the most amateur stock pickers need their own rules. Maybe you're another Buffett looking for companies that consistently perform well with high profit margins. Or maybe you want to focus on companies with lots of cash on hand. Maybe you're a contrarian investor who wants to zig when everyone else is zagging. The point is to find a strategy you like and find gurus who share your philosophy and follow them.
4. Diversify. No matter how much you love the solar industry, don't put all your money into solar stocks. Key to building a good investment portfolio is diversification -- and luckily, all the new exchange-traded finds coming online offer great ways to do that.
There are plenty of ways to diversify a portfolio. Consider investing in other countries, perhaps with iShares MSCI EM Eastern Europe (ESR) or Vanguard Total World Stock (VT). Or maybe you'll want to mix some small-cap stocks like the popular iShares Russell 2000 Index fund (IWM) with your blue-chip corporations.
And your portfolio should go beyond stocks to include bonds and various forms of cash, such as Treasury bills and money market funds. Also consider investing in precious metals like gold and silver and perhaps a dividend-heavy real-estate investment trust like Brandywine (BDN) or Liberty Property (LRY).
5. Be disciplined. This is probably the hardest advice to follow, because it's nearly impossible to keep your cool when your stocks are taking wild swings up or down. Even financial guru Jim Cramer got caught up in the madness, telling investors in 2008 to take any money they needed for the next five years out of the stock market immediately. In hindsight, that was one of the best times to get into the market, as just about everything went back up.
If you followed steps 1-4 above, then you will have the knowledge and confidence to act very deliberately in the stock market. Don't let your emotions lead you by the nose, and don't overreact. Think about how disciplined Buffett is in his approach. He's methodical, nonjudgmental and consistent.
Here are a few of my favorite sites to get more information about investing:
He now has $40,000 in cash earning less than 2% interest, and at that rate will retire with, oh, about two years of spending money. But who can blame him for his fear of the market? The ups and downs of the past few years have wreaked havoc on nest eggs everywhere, and no one wants to get burned again.
But how to do it? How do you avoid the investing pitfalls yet still build that fat mountain of cash? One key step is confronting your fears about stocks and building the knowledge and confidence to invest. It will take work and you'll do it one baby step at a time, but soon enough your inner Buffett will lead the way.
1. Invest in what you know. A stock price is based not on past performance but on what investors think it will do. People expect big things from Apple (AAPL), whose price has hovered between $330 and $360 all year. Not so much with Wal-Mart (WMT), which has been stuck in the $50-$60 range for years.
You must know a stock so well that you can set your own expectations. Learn how to read stocks, and buy the ones you think will go up.
Another way is to get down and dirty with the numbers. Find the price-earning ratio not only for your stock but for others in the same industry. Same with the price-to-book ratio. Get the four most recent earnings reports from the company and read the transcripts of earnings calls on Seeking Alpha. Read analyst reports while you're at it. Become so intimate with a stock that you'll want to make it breakfast in the morning. It's hard work, but it's an absolute must.
2. Follow dividends. Dividends aren't that important for younger investors who have the luxury of time and can take on a little more risk. But as you get older, you start to like the comfort and stability of a solid dividend-paying stock. In fact, many investors aim to live off dividends when they retire.
A company with excess profit usually reinvests it in the business or pays it to shareholders through dividends. Get to know a dividend's yield, which tells you how much in dividends your stock is earning for you. Calculate it by dividing the annual dividend by the stock price. One of the best dividend stocks, Procter & Gamble (PG), has raised dividends for 54 years in a row, giving investors an annualized total return of 7.5%, according to the Dividend Growth Investor blog.
Other good dividend bets are PepsiCo (PEP), Kimberly-Clark (KMB), Abbott Laboratories (ABT), Walgreen (WAG) and Johnson & Johnson (JNJ).
3. Find a strategy and stick to it. I wasn't kidding about channeling your inner Buffett. One of the many reasons Warren Buffett is so adored is that he sticks to his investment philosophy through thick and thin.
Buffett all but ignores the stock market, calling it a popularity contest. What he likes to see are companies that can make money. He wants results. He recently said that if given the choice between all the gold in the world and all the farmland in the United States, he'd take the farmland because it produces and delivers returns.
Even the most amateur stock pickers need their own rules. Maybe you're another Buffett looking for companies that consistently perform well with high profit margins. Or maybe you want to focus on companies with lots of cash on hand. Maybe you're a contrarian investor who wants to zig when everyone else is zagging. The point is to find a strategy you like and find gurus who share your philosophy and follow them.
4. Diversify. No matter how much you love the solar industry, don't put all your money into solar stocks. Key to building a good investment portfolio is diversification -- and luckily, all the new exchange-traded finds coming online offer great ways to do that.
There are plenty of ways to diversify a portfolio. Consider investing in other countries, perhaps with iShares MSCI EM Eastern Europe (ESR) or Vanguard Total World Stock (VT). Or maybe you'll want to mix some small-cap stocks like the popular iShares Russell 2000 Index fund (IWM) with your blue-chip corporations.
And your portfolio should go beyond stocks to include bonds and various forms of cash, such as Treasury bills and money market funds. Also consider investing in precious metals like gold and silver and perhaps a dividend-heavy real-estate investment trust like Brandywine (BDN) or Liberty Property (LRY).
5. Be disciplined. This is probably the hardest advice to follow, because it's nearly impossible to keep your cool when your stocks are taking wild swings up or down. Even financial guru Jim Cramer got caught up in the madness, telling investors in 2008 to take any money they needed for the next five years out of the stock market immediately. In hindsight, that was one of the best times to get into the market, as just about everything went back up.
If you followed steps 1-4 above, then you will have the knowledge and confidence to act very deliberately in the stock market. Don't let your emotions lead you by the nose, and don't overreact. Think about how disciplined Buffett is in his approach. He's methodical, nonjudgmental and consistent.
Here are a few of my favorite sites to get more information about investing:
