not totally without merit.
Many investors have lost
substantial sums of money
in the market. Visions of
investors jumping out of
windows back in 1929 are
graphic reminders of the
risk inherent in stock investing.
Recent events on the market...the
Great Crash of ’87, the
Friday the 13th Mini-meltdown,
the ills of Program Trading,
insider trading, the Mercury
Financial and Bre-X scandals,
have also contributed to
the casino image associated
with stock investing. This
is very unfortunate because
stock investing is one of
the best ways the average
person has of accumulating
substantial wealth. It just
requires a few simple techniques
and some discipline. In
fact, it can be a lot safer
than investing in real estate,
collectibles, or your own
business.
| Here's how to make
good money in stocks
at low risk: |
 |
Buy
stocks with
consistent,
predictable
earnings growth
|
|
Buy
stocks with
earnings growth
rates of at
least equal
to the sum of
current inflation
and interest
rates. |
|
Do
Not put more
than 10% of
your money into
any single stock |
|
Do
Not own more
than two stocks
in the same
industry. |
|
Do
Not plunge into
the market.
Spread the investments
over time. |
|
Use
Stop-Sell orders
to limit risk |
|
Stocks
with consistent, predictable
earnings growth are the
safest stocks you can buy.
They represent the best
managed companies in America.
A stock portfolio with an
average earnings growth
rate of at least 14%/yr.
has a high probability of
doubling in |
|
five years. In twenty years
it will have increased by
1,500 percent.
If you bought 10 stocks,
and limited your loss on
any single stock to 10%
by using Stop-Sell orders,
your total portfolio risk
is only 10%. Your risk on
any single stock is only
1% of your total portfolio.
How many investments can
you think of that have the
upside potential of stocks
with such limited risk exposure?
| MYTH
#3: BUY STOCKS ON
THE WAY DOWN AND SELL
ON THE WAY UP. |
There’s
an old adage that says the
way to make money in the
stock market is to buy low
and to sell high. That,
of course, is an irrefutable
truth. The only problem
is that many investors confuse
this bit of conventional
wisdom with the assumption
that if the price of a stock
is going down it is low,
and if it is going up it
is high. Consequently, they
buy stocks on the way down
and sell on the way up.
There’s hardly a worse thing
an investor could do.
Stocks are bought on the
expectation that they will
go up. If a stock is going
up in price, it is fulfilling
that expectation. When the
price is going down, it
is denying that expectation.
Therefore, it is logical
to buy a stock when its
price is going up. Moreover,
one of the best times to
buy a stock is when the
price has broken above an
old high. At this point
there are no unhappy holders
who are waiting to dump
the stock. If the stock
is fairly valued, there
should be clear sailing
ahead.
| MYTH
#4: STOCKS ARE A HEDGE
AGAINST INFLATION |
For
many years stockbrokers
and mutual fund salesmen
have been saying that stocks
are a hedge against inflation.
Well, they are and they
aren’t. It depends on how
you look at it. |
