Expert: Paul Henneman - 7/28/2004

Question
I am 21 and have had a portfolio for three years on etrade.  I had, and still have no idea what I'm doing.  I have made $100 in those three years.  I own stock in companies like Lockhead Marting, Cisco and Microsoft. All tolled I have $4k invested and I'm looking to sink a couple thousand more.  This time however, I want to make sure I'm not just sinking money into whatever company strikes my fancy.  

Question: What companies should I be looking for?

I want to be able to sink a couple thousand a year and have it build over time.  I am thinking very long term.

Answer
Graham,
  Thank you for your email!
  I'm glad to see that you are thinking about your investments so early, you have time on your side. The way interest compounds, your investment portfolio should be impressive if you keep up the efforts down the road.
  Do not knock yourself too hard for having a $100 return over three years. It has been a tough market. lots of investors have lost money!
  Suggestions on how to improve your stock picking: the selection of good stocks to own is very hard, the 'million dollar question' so to speak. It takes alot of practice. Generally speaking, the companies you list are very large cap, relatively stable companies. This is good and should make up part of your portfolio. But at least half of your portfolio should be more 'actively' traded with companies that have a stronger potential for real growth. Research, research, research will help you to find what these companies are. Some websites to investigate are www.morningstar.com, www.cbsmarketwatch.com, finance.yahoo.com, www.motleyfool.com, there are many others. My own companies website is www.valuEngine.com  I do not want to try to sell you a service as that is not what allexperts is for. Instead, I suggest you look at the 'benchmark portoflio' link to see what a carefully selected basket of stocks can do over time. My companies research indicates that since the overall stock market changes relatively quickly, an investor must perform their research and adjust their portfolio quickly as well. We think once per month is a good time to evaluate a portfolio for an individual investor. There is more on www.ValuEngine.com about how we do this, and the process we use to select stocks, but the other websites I mentioned above will have their ideas as well.
  The problem with this more frequent evaluation is trading costs. If you trade more frequently, your trading costs will go up and eat into your portfolio. THere is a great service called www.FOLIOfn.com they will trade an entire portfolio (up to 200 trades per month) for the flat fee of $19.95. This means that you can hold as many as 100 stocks, even with $4k invested, and trade every single one each month for the total fee of $19.95 per month. I do not suggest that you trade that much, unless you plan to do this full time (I do not recommend that either!). But it will give you the flexibility you need.
  Also, practice, practice, practice! Begin to try to come up with a consistent evaluation process. A stock should meet exact requirements before you invest. Test our your ideas on free portfolio tracking websites such as finance.yahoo.com  Be carefull to fully update the portfolios as needed on the schedule that you choose, and try various strategies for selecting stocks. Keep tracking everything over time, see what does best. For example, the strongest portfolio may have more volatility (short term up and down swings), but return much more over the long haul. But I would avoid small, risky companies that can be identified with very high P/e ratios. Perhaps one or two of these can be tried if you feel you want to take a risk (which can go either way), but do not invest only in micro cap, risky companies.
  If all this seems like too much work, they a mutual fund may be the answer. An index mutual fund will follow the overall market, and have very little fees associated with it. Typically, if you carefully research, you should be able to outperform a mutual fund on your own by quite a bit. But many do not have the time or patience, and if this is the case, look at mutual funds. www.morningstar.com is the best please for mutual fund research.
   To sum up, investing is a long term game. The secrets are research, patience, and discipline. THere are lots of investing books that discuss various strategies, read everything with a critical eye as there are alot of folks out there with no clue writing books. but there are alot of good ones as well. If it makes sense to you, the research seems solid, practice with a test portfolio and only truly believe when your results are good. Investing should be a hobby of everyone, as even with limited means a lifetime of proper thought out investment can lead to a wonderful lifestyle in the second half of life.
  I hope this helps! Please do not hesitate to follow up if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com