Are you Thinking of investing in the stock market? Here are 10 principles to help guide your approach to the market from a long-term point of view. Each principal embodies a fundamental concept every investor should understand:
1.Sell the losers and let the winners ride!
What is the one mistake most investors make – they hold onto a stock where they have loses waiting for the big turn around but it doesn’t happen. Be prepared to cut your losses on hopeless stocks. Of course, the idea of holding onto high-quality investments while selling the bad ones is great in theory it’s hard to put into practice. The following information might help:
2. Don’t chase a “hot tip”.
No matter where you get a tip even if it comes from your brother, your neighbor or even your broker, don’t accept it as fact. Do your own research – don’t gamble with potentially bad advice. Tips may be good to help find a needle in the haystack but make sure its one that won’t prick you.Be an informed and knowledgeable investor.
3. Don’t sweat the small stuff.
As a long-term investor, don’t panic with short-term movements. Keep the big picture in mind. If necessary, reconfirm your assumptions why you bought a stock in the first place.
4. Don’t overemphasize the Price/Earnings ratio.
It is one tool among many but using only this ratio to make buy or sell decisions can be disastrous. The P/E ratio must be interpreted within a context of other information. A low or high P/E ratio doesn’t necessarily mean a security is under or over-valued.
5. Resist the lure of penny stocks.
A common misconception is that there is less to lose buying a low-priced stock but that is not true. If you put $1,000 in a penny stock or in a $100 stock, a 50% drop is $500 in both case. With penny stocks there is added risk. Penny stocks tend to fluctuate up and down more, there are often less regulations governing the company, and often the stock is thinly traded and hard to get into or out of.
6. Have a plan and stick with it.
There are many successful investment strategies. Once you have a plan, stick with it. That does not mean you should never change the plan but let it evolve. If you are unfocused, it’s hard to measure what is working or not working. You are also then prone to the latest craze – most investors are unsuccessful trying to time the markets ups and downs.
7. Focus on the future.
We all wish we had crystal balls. Make informed decisions about the future based upon the best available information at the time. Keep in mind what your long term goal is about
8. Keep a long-term view.
Short-term profits often entice novices new to the market. You need to throw away the “make a killing” mentality. If you are more interested in quick profits – become a day trader, not a long term investor. Either style can work but each has its own strategies and risks
9. Be open-minded & diversify.
Many great companies are household names, but many good investments are not household names. Smaller companies have the potential to turn into the large blue chips of tomorrow.But keep in mind, the top 1-2 market leaders in an industry tend to deliver the best returns. More importantly, diversify so you have large and small companies, US and international companies, and spread the risk and growth opportunity across markets such as energy, financial, manufacturing, etc.
10. Be mindful about taxes, but don’t worry.
Too many people are concerned about the tax consequences of their investment strategy. Taxes are important but should be a secondary concern. The primary goal is to grow your investments and keep them secure. By investing long-term, you postpone taxes and increase your leverage.
You just read 10 sound tips for long-term investors. These are general rules of thumb. Exceptions exist to every rule and be mindful of them.