General Stock Investment Strategies/stocks
QUESTION: Hi Todd- Im Russ. I set aside about $20 K last year and put it all into individual stocks...good stocks like Gilead, Apple, Disney, HP, Altria, BABA and a few others. I also bought some biotech penny stocks with good potential. I own about 20-25 stocks total. thing is now im starting to think that it may not be good to have so much in individual stocks; i would say 15% of my total portfolio is individual stocks and i have them in my IRAs and most in my personal investment account. I also have about 35% of my portfolio in cash and a separate money market. Im really waiting on a market crash so i can pump all the free money into the market, but am wondering if i should still keep all my stocks or reduce the load a bit in the event that there is a big crash on the way. Any advice would be appreciated. Im now 40, single and dont plan on retiring until 70. thanks for listening!
ANSWER: Hi Russ. It's good to see that you are taking a strong active role in your investments at this age. That likely puts you ahead of the crowd by a long shot.
If I read you correctly your question boils down to should I keep all my holdings in stocks or lighten up some on my stock holdings (motive being the possible fear of market correction or crash)?
I can tell you that I have been concerned with the market being more overvalued than undervalued for a long time. I've been over 85% in cash for over a year, for the simple facts of not finding any undervalued stocks to invest in, and because I too am concerned about a market correction of 10, 15, 20% or more. The rest of my holdings are in stocks, three to be exact.
Understand that I am answering your question from my being a undervalued stock investor, and not a momentum or growth investor. I like my growth to come from buying a stock when it is out of favor, not when it's the darling of Wall Street.
Here are some things for you to consider. 1) Do you already have gains or losses in your stock holdings? If you have losses then you have to be willing to hold on to them through a broad correction which will likely take down the value of your holdings even more. If you have gains, would you rather have the cash now believing that the individual holding will not recover as quickly as you would like after a correction.
2. Would you rather hold on to your stocks at these prices, or possibly buy them or other out of favor stocks at cheaper prices after a correction. Do you have eyes for what stocks are better for you to hold?
3. If during a correction, do you already know what you want to sell? Can you execute those plans with efficiency? Can you get out of your holdings faster than the market drops?
4. Your holdings of 20-25 stocks is a lot of stocks to hold onto and to keep abreast of. If you are doing this for a living, then maybe you can keep up with fundamentals and news (versus noise) on that many stocks. I invest for a living and trying to keep up with that many stocks might be a bit much for me, but everyone is wired differently. There might be a mutual fund out there that can mimic what you are trying to do, but then you have to consider the expense ratio for them doing the work for you.
5. What kind of returns are you generating over the past 5 or 10 years or more? If this trend continues will this meet your retirement goals? Does this take into consideration the possibility of higher capital gains taxes? I myself would rather be in concentrated holdings 4 or 5 times over the next 20 years or so, (I'm 57) than spread my portfolio over too many stocks thus diluting my returns potentially. My goals take patience and being a bit aggressive with allocations when it's time to allocate to individual stocks.
Bottom line: Weigh which you think is better, have the cash or the stocks you own through the probability of a correction/crash. Are you sleeping well and not worried in trying when you are trying to fall asleep at night? If not, you might want to rethink a little deeper on who you are and what you are comfortable with. If a correction/crash were to start, can you recognize it in time to get out of the holdings that you no longer want given a correction/crash is happening? (Most people can not do this.) Can you hold on through the downturn and will you be comfortable knowing that others are buying in at a basis that might be considerably less than your basis, (are you okay with others looking smarter than you)?
I think the market is not undervalued in the least. This is why I've been holding mostly cash for the past, almost year and a half. I've been blessed with making some nice profits the last time I was mostly holding stocks. Now that they have matured enough and I figured them to be getting overvalued, I sold them. Even though waiting for undervalued stocks to appear can be trying my patience at times, I plan on sticking to my strategy. I've back tested my strategy plenty of times and trust in what God has shown me to do.
I hope you do well.
If you want to see my website you can go to stockopinionletter.com. If you have any other questions or if I have not explained my answer to your question clear enough, then please write me back.
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QUESTION: Hi Todd- thank you so very much for all the feedback. I do appreciate you taking the time
to answer some of your questions:
1. I have only been invested in individual stocks since June. I have had both gains and losses but at this point am about even. I put some $ in Alibaba then it went down 20%; my best performers are Disney, Apple, Whitewave Foods, and NVIDIA. The largest dollar positions i have are Alibaba, Gilead, Apple and JNJ.
2. I want long term growth, but yes I am concerned that if the market crashes they may not recover.
3. As for timing i dont have much experience so wouldnt know when to sell out prior to a crash.
Bottom line im rolling the dice but also being conservative too. I have a nice chunk in cash and also a good percentage of my portfolio is in bond funds for some protection. so if there is a crash im ready for it. But it would also be nice to not lose my current gains. This past September i rebalanced my portfolio and had everything in cash prior to the 10% correction, so i got lucky and after the market dipped i bought back in slowly. Seems big dips always take place around Sept/ Oct so maybe thats a good time to sell and rebalance? Also the lections always seem to weigh heavily on the markets.
Any additional advice would be appreciated.
ANSWER: Hi Russ. From what I get I think you are saying that you have only started to invest in stocks since June. I will try to address your topics by number.
1. I am thinking this is maybe your first attempts to invest in stocks in your life. Have you done any studying on how to invest, that is, do you have a real concrete plan of rules that you plan to live by when you invest? If you are just going off of what somebody else is saying, and then you are going off of what somebody else is saying for the next stock pick, then I would suggest that you take time to read a lot of what kind of strategies others are doing before you start trying to follow what Person A is saying, then leaning on Person B for the next stock pick, then Person C for the next stock pick, and so on. You really need to become convinced of one particular strategy and maybe follow people that also use that strategy, but know in your heart that that strategy makes sense for you. There is nothing worse, in my opinion, than having too many cooks in the kitchen.
Trading is what happens when you get in and out of a stock in less than a year's time. I tried that initially as one of my strategies. I did well for about 6 months, then I began to lose lots of money. From that I went to being a value, that is undervalue investor. I searched out stocks that were trading for less than what I believed their value was worth. And back then, just like I do today, I do not invest in a company unless I'm willing to hold my position in a company for at least 5 years. These are just two parameters by which I live by. I don't care what others are doing. If you trade in stocks because of what others say, and you are profitable more than 80% of the time, you are better at making money than I am. I am just no good at trading. Not very many people are. If you are a trader, then you may need to talk to someone else. I am an investor, which means I hold my positions for over a year. Like I said, when I invest, I expect my hold time might be for up to 5 years.
2. Long term growth does not come with trading. In my opinion long term growth comes from buying companies that are undervalued and that are paying dividends. If you are concerned about recovering from what might happen in a correction/crash then you may want to start taking money off the table. I am in this position right now. Like I said, I'm over 85% in cash for the past year and a half or so. I think the market could be ready for a downturn, but I've been thinking this for over a year.
3. Timing- this is one thing that you should pay attention to. The market has cycles and individual stocks have cycles. They always do and likely always will as long as there is freedom in the markets. You have to look about both broad market cycles and individual stock cycles. By the way, there are also sector and industry cycles too. This is very important for you to know if you want to have long term growth.
If you don't want to lose your current gains and you are nervous about what might happen in the future then you need to have a plan on what you will do and when to keep those gains. If you are trying to time the market to get out just a week or month or few months before the correction/crash then I think you are playing Russian Roulette. Like I said in the earlier email, most people, (99.999%) of the people can't do this for even one cycle, much less two cycles. Don't fool yourself that big dips always take place around Sept/Oct. I've never heard that and it does not seem to match the graphs that I have which go back to 1950. Yes, elections do have a way of moving the markets. You are right about that.
If you want to be a long term investor I suggest that you do some reading on what it is you want to be. A good book to read is Security Analysis by Graham and Dodd. Also, you might want to look up Berkshire Hathaway's website and read some of Warren Buffetts letters to his shareholders.
If you want to do better than most of the people out there, that is most of the stock investors out there, then investing in an index mutual fund that mimics the S&P 500 might be a way to go. Only 20 to 25% of the people ever beat the S&P Index in any given year. Only 6 or 7% of those "investing in stocks" will beat the Index two years in a row. An index fund that mimics the S&P 500 takes all the work out of your decisions for you and you beat most of the other investors out there to boot.
But like I said, I think the market will correct sometime in the next year. Now is not the time to be putting money in an Index fund like I was just describing. It would be more prudent to wait till the market corrects to invest. Then invest for the long haul with whatever stock or fund you invest in.
I almost always encourage others to get used to the market by investing in a mutual fund first. It is safer with broader diversification with one investment than what most people can do on their own buying individual stocks.
I put out a newsletter for people that concentrates on finding undervalued stocks. It's up to you whether you invest in the stocks or not. It's up to you how much you want to invest in a stock or not. I do not tell you what to do, and I don't want to know how much money you have. I only tell you if I think the stock in undervalued or overvalued. I am a strong believer in giving people information so that they can make the right decision for themselves. The price of the newsletter is on my website. If you look at the website and have more questions about the letter then contact me. I will be happy to talk directly to you over the phone. If my way of thinking does not make sense to you, then there are plenty of other newsletters out there that might be more in line with how you see things. Just look up stock newsletters on the internet, there are hundreds of them out there.
Let me know if there is any thing else I can help you with.
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QUESTION: Hi Todd- thank you again for all the great information. I like your investing strategy and plan to hold my current positions for the long haul. I sold a few pharma penny stocks that were tanking but fortunately didnt lose too much on those. Let me ask you this..do you contribute to every security you own when there is a correction? I read that its best to just dump as much $ as you can into the S&P but also put some money into bank stocks like Wells Fargo cause banks historically bounce back from crashes. My most stable long term growth stocks are Apple, JNJ, ALtria and American Waterworks so perhaps i would just buy more if these were to drop along with the S&P.
Contribute when there is a correction: I normally do not buy more stock when the price goes down. I try to do all my buying with the initial purchase. If the company goes down I will always think about my options but I try to space all my buying in about the same time frame. Now if I think that the holding period might be a pretty long time then I will think more about buying more shares. The reason being, when I want to sell a stock I want to sell every holding of that stock. I don't want to sell in under a year when the capital gains taxes are so much higher.
Dumping money in S&P: Not sure what you heard about that. It's a good investment if you don't know much about the market or if you just want a well diversified portfolio. They are the largest companies in America and mostly that is a safe bet. If one company fails, it does not take down the whole investment so your loss is very limited. I just gave an opinion to a friend last night that she might want to wait till the S&P corrects/crashes before she invests (this would be her first time to invest in the market) into an S&P 500 index fund. There is talk that the correction could be rather deep when it happens. I thought it was going to happen last year. Hummpf, shows you what I know.
The stocks you mentioned are well known by the general populace, except for maybe Am. Waterworks. The other three I can see being around for a long time. Your basis, what price you bought in at, is the most important thing to keep in mind once you have determined that you want to invest in a company. It determines whether you make a profit or not.