Investing for the Long Haul
Since your odds of winning the lottery are slim...since you may not have any rich relatives who adore you...and if you are not at the precipice of conceiving the next Google, or inventing the next miracle wonder drug this page is for you.
In the world of investing you might very well get lucky and hit the next big stock. But chances are that you want to invest your money for the long haul. Buy mutual funds and stocks and plan to keep them for the long haul. If you are in your twenties you have a good 40 years with which to accumulate wealth. Even if you are in your mid forties you have twenty years or more. This is a long period.
Buy and Hold
Look for good funds and stocks and plan on holding them for at least five years.
While there is a great deal of sage advice out there the best formula for buying is to buy low and sell high. Buying stocks like Pfizer, Merck, GM, GE, and other fortune 500 companies and holding them through thick and thin can be a winning strategy.
Lets say you bought Pfizer in 1997 when it was selling for $15.00 a share. Pfizer is a solid drug company employing over 100,000 workers with a market capitalization of 196 billion dollars, 52 billion in quarterly earning, over 14 billion in cash, and current profits on earning at 24%. Not exactly a "fly by night" operation. Suppose you bought 100 shares and held them for the past ten years. What would your investment of $1500.00 be worth today? Well first the stock split twice, once at 2:1 and then at 3:1. So, your 100 shares is now 600 shares. The stock is currently trading at a little over $27 a share. Your $1500 dollar investment is now worth $16,200. Not shabby for a $1500.00 investment. But wait, you have actually made more than that. The stock has paid an average 0f 3.5% per quarter in dividends. You would have actually made more money just on the dividends than if you had invested the same $1500.00 in a CD for the same 10 year period. While it is true that there is always risk in investing in stocks, in the grand scheme of things we are not talking about a risky investment here.
If you want to be even more conservative in your approach, invest you money in a good growth and income mutual fund and let the professionals do the work.
Another key advantage of buy and hold is that it requires less on-going work on your part. Aside from the initial research there is not much else to do.
Dollar Cost Averaging
This strategy has you find a stock or mutual fund and buy shares of it over an extended period of time. The advantage of this strategy is that when the stock is down you are buying more shares. When the stock is up you are buying less shares but your overall shares tally is worth more. This strategy is also a good way of reducing your risk over a long period of time. Many mutual funds allow you to buy as little as 25 dollars of a fund per month. Many will actually lower the initial investment you must make if you sign up for such a program.
There is a psychological advantage to this type of strategy. When the market is down you are buying more shares at a lower price. Remember you are investing for the long haul. I remember telling myself this from 2000 until 2004 with respect to the monthly allocation that was going into my 401k even though the funds were trading at a loss at this time. Again, if you are buying solid companies then you should view buying when the market is depressed as an opportunity to buy more share using this strategy.