By Haddon Libby
Has recent volatility in the stock market left you feeling queasy like a rough rollercoaster ride?
Here are a few investing tips used by successful investors that might help you.
Successful investors have an Investment Plan and an Investment Philosophy while maintaining a Diverse mix of assets managed in a Disciplined way.
Do you have a plan? As an example, if you want to retire at a certain age, you need to save enough to afford that goal. If your investments need to grow at an 8% rate in order to support your goals, investing in 0.4% bank CDs probably will not work. Rolling the dice on risky penny stocks probably will not work either.
By defining key pieces of your plan, you can set an approach to investing that will have a highest chance of success with a level of risk that you can stomach.
What is your investment philosophy? I like to invest in companies with low debt levels and strong cashflows that possess economic moats against competition. I like companies that can pay dividends so long as those dividends do not prohibit reinvestment in the business. My approach means that I have to do a lot of research and monitoring.
I also try and stay out of the way of freight trains. What do I mean by that? If an oil company is paying a nice dividend, I won’t own it as the downside risk to principal loss (and a dividend cut) at present probably outweighs the upside opportunity. Part of my philosophy includes owning stocks that participate in most of market movements on the upside but avoid market downturns.
When investing, diversify. One of the biggest mistakes that people make is that they fall in love with specific industries and companies. A successful investor has a mix of holdings in companies in that do business in different industry sectors (e.g. consumer staples, utilities, communications, etc.). Second, they want a mix of companies that are in growth mode along with more stable companies that produce strong cashflows yet grow more slowly. Third, they diversify based on the regions of the world that the companies serve. Fourth, they own a mix of giant, large, medium and small companies.
Along those lines, avoid stocks under $5.00 a share as well pink sheet stocks. While this may mean you miss a few opportunities, this segment of the stock market has the greatest number of company failures as well as outright frauds.
Stay disciplined. Recent market gyrations show that you should not change your investment philosophy willy-nilly. Successful investors stick with an investment philosophy and make adjustments as needed. Those who change their philosophy regularly often underperform as they are more inclined to buy high, sell low and act on emotion versus critical analysis.
Another important tip – avoid day trading. As computer trading accounts for the majority of all buys and sells in the stock market, it is nearly impossible for the average investor to outwit these complex trading algorithms. Your chance of beating the market as a day trader is probably on par with winning at casino slot machines.
If this is all too much for you and you decide to hire an investment advisor, make sure that you have one of their competitors look your portfolio every few years. I cannot tell you how many times that I have seen a ‘good friend’ investment advisor take advantage of that friendship for their own financial gain.
Lastly, be wary of annuities and limited partnership investments as those types of investments pay your advisor their highest commission which can cloud their vision and put your financial objectives behind their financial interests.
Haddon Libby is Managing Director of Winslow Drake, an investment advisory firm and can be reached at email@example.com or 213.596.8399.