The Dow Jones Industrial Average and S&P500 have been choppy for the last many months. Perhaps you hear that people’s portfolios are down 5%, 10% or even more. The housing market is a shambles. The news has abundant stories of an economic slowdown and recession is being whispered freely. Surely I should wait until things get better before putting my money in the market, right?
Not necessarily. When the stock market becomes volatile and the price of shares stars to fall many short term investors exit the market and place their money in GICs or money market accounts. The exit strategy is intended to preserve their accumulated wealth. It sounds like a good idea but rather than sell out you should buy more because share prices are cheaper!
Keep in mind that it matters what you buy. If you buy, say Wal-Mart and hold it for 10 years and buy more when prices are depressed, you will have quite well. If on the other hand you decide to invest in a brand new bio-tech IPO with no earnings or track record, don’t be surprised if you have to sell out to keep from losing your shirt.
Here are my tips for stock picking:
1. Invest for the long term. Don’t be short sighted and look for get rich quick shares. If you don’t have the time to daily monitor the management and press releases of the company then don’t buy it.
2. Pick high quality companies. Look for years of proven earnings, dividend growth, and credit quality. It doesn’t always work because good companies fall on hard times, but those with a solid performance will weather short term volatility better.
3. If you have a dog that is not predicted to recover, sell it.
4. Diversify across industries and boarders. You be insulated if one sector has economic trouble and if a country has an economic down turn.
5. Review your portfolio annually.
If you have a well thought out financial plan, a market downturn should not cause you to react to short-term volatility.