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Investing Ideas for 2006

This is a good time to sit back and reflect on what went right and what went wrong in 2005. Here are eleven investing ideas for you to think about when you plan your strategy for 2006. 

Slow and Steady
When it comes to the stock market, the fable about the tortoise and the hare is true. Successful investors get rich slowly. Avoid the temptation to swing for the fences.

Put Compounding to Work
Compounding means that you reinvest your returns rather than spending them. Thanks to the power of compounding; a regular investment plan can yield surprising results. For example, say you start with nothing and invest $100 every month. Assuming 10 percent annual returns (roughly equivalent to the overall market), you’ll have $21,000 after 10 years, $77,000 after 20 years, and $228,000 if you stick with your plan for 30 years. 

You can benefit from the power of compounding by committing to an automatic investment plan. The easiest way to do that is by setting up an account with a broker or mutual fund that automatically deducts a fixed amount from your bank account every month.

Take a Long View
Avoid making decisions based on recent market action. All too often investors pour money into hot markets just before they cool, and shun weak markets primed to soar. The market can turn on a dime. You’ll often miss a major move by the time you realize what has happened.

Avoid Underperforming Stocks
Most stocks, even the good ones, drop in a down market. However a stock heading down when everything else is going up signals risk. It’s possible that insiders are dumping their shares in advance of bad news that hasn’t yet been made public. Don’t overreact to a two or three day drop. But be suspicious when your stock underperforms the market for an extended period, say two weeks or longer.

Favor Strong Stocks
I know that we’re told to “buy low and sell high,” But, in fact, there is considerable research showing that, all else equal, you’ll do better buying stocks that have already outperformed the market than those hitting new lows.

Ignore Market Gurus
It’s scary when you hear that the guru who predicted the last bull market is now forecasting a crash. But, there’s always someone predicting just about anything. Just because one of them got it right once doesn’t make them Nostradamus. Make your decisions based on each firm’s fundamental outlook, not on market predictions.

Avoid Decisions Based on Interest Rate Predictions
Many smart people have gone broke by betting wrong on which way interest rates, the price of gold, the value of the dollar, or oil prices are heading. Avoid investments that depend on such predictions for success.

Consider Dividend Stocks
Without dividends, the only way you make money on a stock is by selling to someone else at a higher price. Of course, that’s my goal too. But dividend-payers are the only stocks that pay you while you wait for them to go up. Many consider dividend stocks boring, but you won’t when you see your broker’s statements. According to Standard & Poor's, in 2004, dividend payers returned 18% compared to 14% for non-payers.

Diversify
It’s tempting to load up on stocks in today’s hot industry. In times past, that strategy worked because once in favor, an industry often continued its winning ways for years. No more. Now, an industry can turn cold overnight.

Instead, reduce your risk by diversifying. A sector is a major segment of the economy such as industrials, consumer goods, healthcare, technology or financials. Avoid investing more than 25 percent of your funds in any one sector.

An industry is a part of a sector such as semiconductors (technology) or regional banks (financials). Avoid investing more than 10 percent of your funds in any one industry.

Research Stock Tips
It doesn’t matter whether your latest tip came from Warren Buffet, your stockbroker, or from someone at the gym; they all require research. Even the best tips may be for stocks that don’t match your investing style. The American Association of Individual Investors (www.aaii.com) is a great resource for learning how to research stocks. The group sponsors local investing seminars and publishes a monthly magazine packed with investing tutorials.

Don’t Check Stock Prices During the Day
Stocks make short-term up and down moves for unfathomable reasons You’ll drive yourself crazy checking on your stocks too often. If you hold fast moving “rockets,” check prices daily after the market closes. Otherwise, once a week is enough.