Investing must be systematic and patient
The stock markets affect the lives of almost every person alive in the United States.
Even if not directly invested in stocks, we all deal on a daily basis with companies whose fortunes and consequently, services and products are affected by the swings of the stock market.
Most financial analysts believe that stocks are an essential part of everyone’s portfolio and a key element to saving enough for retirement.
There are some however, who believe that stocks are not absolutely necessary to have a successful and prosperous retirement.
Instead, such people choose other, ‘safer’ methods, such as Savings Bonds, Treasury Bills, gold, and Certificates of Deposit to achieve more or less the same gains as the volatile stock market. This is an intriguing view and will be discussed in a subsequent article.
For those who invest in stocks, they can be a powerful vehicle to save for retirement and the stock markets have, over time, provided gains that exceed inflation and many conservative types of investment (arguably, since there are some analyses that say otherwise).
Which Stock Market?
When talking about the stock market, we actually mean several stock markets. For most U.S. investors, this means stocks listed on the U.S. Stock Exchange in either the Dow Jones Index or the NASDAQ.
It is possible however to invest in stock markets in other parts of the world, such as the the British Financial Times Stock Exchange (FTSE) or Hong Kong’s Hang Seng Index.
Fortunately, investing in foreign stocks is simple as most cross list with US stock exchanges and can easily be purchased here by professionals and home traders alike.
Balance Risk
Two keys to investing in the stock market are balancing risk and not being greedy. Balancing risk means you should avoid investing all or most of your money in one stock e.g. Wal-Mart, or one sector, such as transportation.
The purpose of this strategy is to minimize risk. It prevents you from getting wiped out by a company’s bankruptcy or by poor fortunes in a particular sector. Investing in multiple stocks in different sectors minimizes risk and provides diversification so you can benefit from gains in multiple sectors.
Financial analysts also urge global diversification to prevent a country’s under performance from unduly affecting your retirement portfolio.
For the U.S. Investor, this translates into perhaps 10-25% of your portfolio being invested in International stocks.
Remember however, that investing in some U.S. multinationals that do significant business overseas, such as MacDonalds, Caterpillar and GM can fulfill the aim of global stock exposure.
Many of these companies are somewhat immune to economic shocks in the U.S. because much of their profits are made overseas. So remember to diversify and avoid having all your eggs in one basket.
Know Your Risk Tolerance
Everyone tolerates risk differently. Some folks cannot sleep if 10% of their investments are at risk. Others sleep like babies with 80% of their investments up in the air in high-risk investments.
Know your own personal risk tolerance and stay conservative if that will help you sleep better.
Avoid Greed
A second guideline for investment is to avoid greed. Another way to put this is to take profits off the table. A typical scenario occurs when a stock price doubles. Eager to make more money, the investor might invest even more instead of parking some profits.
In some cases, the stock may retreat to the original price and even below that, creating losses for the investor.
One piece of advice is for investors to set a limit at which they park some profits. That limit might be 33%, 50%, 75% or 100%. The important thing is to follow your own rule without fail and not get greedy.
Don’t follow every speculative investment out there and be extremely careful about penny stocks, many of which are hyped up by disreputable organizations in order to suck in hapless investors, after which their prices crash.
