Investing without research is like playing stud poker and never looking at the cards. — Peter Lynch
How often have you wondered how nice it would be to invest if you can master the best way to invest money in the market? Why is it so hard to make money in the market if you can dig out financial facts in the matter of minutes by visiting Yahoo finance or any other millions of investment sites on the Internet?
We all have faced quandary to find best way to invest and grow our money in this tough economy. I don’t have a magic wand, but I certainly want to discuss facts about some investment myths — to protect and grow your money.
Let’s think through a mind of an investment banker on the Wall Street, or a so-called pundit on CNBC before we discuss these myths. These experts make a ton of money by making sure that you hear these myths over and over so that they can profit from it. How else are they going to make millions in this economy every year?
Okay, without further ado, I am going to uncover these myths so that you can act in tandem with the investment banker to make money in the market.
“Buy and hold” is the safest way to make money.
Our Web is full of those who calculate retirement income based on the average 6% return on your investment. Cool, right? Not true!
After all, in early 2009, S & P was below where it had been in 10 years before. Out of curiosity, I went back to 1960’s and found that there are 10-15 years period when index returns nothing; add inflation to it and you are losing money.
As you can see in this chart, Dow opened 1966 at 983.51 and closed in 1982 at 991.72. That’s measly 1% return in 17 years. That’s not too assuring to those who were about to retire in those 17 years.
My thoughts:
Wouldn’t it be nice if I can predict bottom and top of each market cycle? It would be nice, but no one can predict what will happen in the few months, let alone where S&P would be in the next 12 months.
Instead, I use a simple theory — charts never lie!
I check the trend of the market by using 50 day moving average for both Dow and S&P. Once both indices break their 50 DMA, I sell my stocks and wait for a better market condition.
An alternative to buy-and-hold investing
If you gauge health of the overall market condition, you will find best way to invest your money in the market by selecting top quality, blue chip stocks — preferably with high dividend yield — to add to your portfolio once market recovers. You may not be able to buy them at the rock bottom price; nonetheless, you will be better off buying these stocks once you find both Dow and S&P in the up-trend. You can invest an equal amount of money in 5-10 stocks depending on the amount you invest, and wait till market tops.
Dollar-cost averaging is the best way to invest money
Dollar-cost averaging is the practice of investing equal dollar amounts in the market at regular intervals in both up and down markets — remains sound advice for anyone investing for the long haul according to pundits. Sounds great, right?
Well, facts tell a different story especially in the down market with so much uncertainty about the global markets. It’s really a sucker’s game where you are literally trying to catch a falling knife!
Let’s do a little sanity test. Shall we? Assume that you have a $100,000 portfolio — and invested $5,000 every other week for 9 months( Most dollar-cost averaging advocates recommend a 6-12 month period) — in 2008 market before and after the market sell off.
Here’s the result: You have lost 45.6% — even worse than S&P’s 31.7% loss — so now your portfolio is worth $54,407. And who was selling you these stocks while you were playing sucker’s game? You’ve guessed it right. Those pundits who preached dollar-cost averaging were happily selling you their stocks.
Another Achilles’s hill for the dollar-cost averaging folks is to remember that many major corporations that once dominated their niche, lost their competitive advantage. Some — like Dell — survived, but others — like Enron — are in the pages of history. If you happen to dollar-cost average in any of these stocks then you essentially purchased stock certificate to hang on your wall for how not to invest lesson.
Average Up:
My foremost goal is to invest safely. I’d rather invest in high quality, blue chip stocks like Apple, when market conditions improve and stock is on its way up.
Parting thoughts: There is no single best way to invest money in the stock market. However, you have to understand risk involved with any investment approach, including those that you hear repeatedly on financial networks or read on major finance related sites. It’s your money; invest wisely. The best way to invest is to protect your investment. Do you agree?
Readers: What is your thought about market performance for the past 10 years? Do you think dollar-cost averaging is for everyone? I am wondering if it is wise to advice someone in his retirement years to have patience.
Photo by: Gary Dunaier
Thanks for exploring these standard Wall Street money manager conventional wisdoms. I’ve always thought that the impetus behind investing rules like these is to sustain and grow the money management biz, not to help the customer achieve maximum gain. So many bits of accepted wisdom are simply false upon examination and analysis.
Yeah. Our blogosphere is full of these rhetoric, and I am not against it. But, you have to think if we are all thinking same way then why we end up making measly few percent on our investment while these investment bankers make millions.
I love the trending chart idea, Shilpan. That’s golden for someone like me who’s new at investing. I never thought of doing that. Thanks for sharing your knowledge with us newbies and those that aren’t so new but could use the refresher!
Thank you Michelle. My intention is to emphasize that even though buy-and-hold is a widely touted theory, sometimes it’s better to sell and take profit as markets correct.
This is my formula:
– Buy and Hold
– Dollar Cost Average only when there is a correction in market
– Only buy dividend paying stock minimum 3% annual yield
– Plan a diversify asset class that pay you 7% annual yield. This include company that pay high yield now and company that will pay high yield in the future (dividend growth stock)
– Only buy good quality stocks, don’t buy poor quality stock because their price is low
– Mix stocks to produce 7% yield by choosing high quality from REIT, mREIT, MLP, Royalty, BDC, International ADR and Blue chip stocks
– Reinvest your earned dividend only when there is a correction in market otherwise keep in cash
– Example of REIT: GOV, HR
mREIT: NLY, AGNC
MLP: EPD, KMP, STON
Royalty: BPT
BDC: FSC
ADRs: TOT, CPL, WBK
Blue Chip: JNJ, PG, MCD, PEP
Note: This is not a recommendation. Perform your own due diligence. Presentation of information does not necessarily constitute a recommendation to buy or sell. Never make any investment without conducting your own research and reading multiple points of view.
Wonderful advice, AJ. I used to work for JNJ, so I have quite a few shares. You can’t go wrong with the Bule Chips with high dividend yield. However, I’ve sold covered calls on JNJ and GE before. I always buy back when these stocks go down below my strike price. Again, as you’ve mentioned, I am not recommending any specific stock. My intention is to show that you should not embrace widely known investment advice without being pragmatic about taking action when market tops.
I only pick stock that have long term staying power, pricing power, minimum impact from commodity price fall, providing hedge when interest rate is low.
For example, PEP, PG and KO have staying power, pricing power, MCD is all over the world and their real-estate value gives inflation protection. MLP such as EPD, KMP are oil and gas pipeline which has very little impact by fluctuating oil and gas prices because they are like toll road. mREIT stocks do well when there is low interest rate environment so that they can borrow low, leverage and land with higher rate. ADR are good investment because in Europe and Asia they pay higher yield than here in America and you also get exposure to BRIC and emerging market.
Dividend growth stocks are to hold for ever and even pass to your children. If you have bought MO ten years ago and hold it than you would be making 35% annual dividend. If you have bought WFC during 2009 melt down than you would be making 10% dividend right now. If you have bought MCD in 2003 than you would be making 17% annual dividend. Same with MLPs, PG, JNJ. This is the way to make money. Long term wealth plan.
Think about how much Mr. Buffet is making annual dividend on his original purchase of KO, AXP, WFC. Why would he sell them? Buy and Hold is good but depends on which one you buy and hold. I would never buy and hold company like RIM, and NOK. Dollar Cost Average is good but I would not do that just every month but rather do it when market correct itself and market do correct once or twice a year (more or less).
Note: This is not a recommendation. Perform your own due diligence. Presentation of information does not necessarily constitute a recommendation to buy or sell. Never make any investment without conducting your own research and reading multiple points of view.
Thanks AJ. Now, I am learning some amazing facts from you. Those dividend returns are incredible.
Again, my view point is that most mutual funds have returned sub par compared to an index fund. It’s better for us — mere mortals — to start taking control of our investments, and our financial future.
I truly believe that you should be genuinely interested in researching/analyzing investments if you want to invest in the markets. If you aren’t really interested in doing the legwork – hire a financial adviser. Don’t gamble by investing in things you aren’t informed about.
Agreed. If you don’t have time or confidence to invest yourself, I recommend hiring a professional financial planner to help you manage and grow your portfolio.
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I love the Peter Lynch quote, Shilpan. It’s not only true, but it goes right along with the theme of this post. I’m not an expert when it comes to investing, so it would be crucial for me to combine my own research with seeking financial consultation. Personally, I’ve always heard that the buy-and-hold investing was the safest way to invest. Thanks for sharing your thoughts.
I admire Peter Lynch. I agree that even if you rely on an adviser, it’s prudent to do your own research before investing in any equity position.
You know I am all aboard with only investing in strong dividend paying blue-chips! This is good advice. Sure you could gamble with growth stocks, but I’d rather bet on the known winners.
On the “Instead, I use a simple theory — charts never lie!”, I would have to append this with “but make sure you know where they come from”. Don’t worry about your chart though. In Shilpan we trust! 🙂
Thank you MMD for your kind words.
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