Ted Allrich is the founder of The Online Investor and author of Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he offers advice to investors who are just getting started.
A new year always holds great promise. Resolutions are made. Intentions are strong. Still each year, as the days pass, resolve wanes and soon we're back to our old ways. This year be different. Here's a chance to make some investing resolutions, act on them, and have a positive impact on your wealth.
First, pay off credit cards. This is the one of the strongest investments you can make because credit card debt can hit as hard as 18% or higher. Very few stocks make 18% or better. The average return for large stocks is 10% a year, for small stocks 12%. You do the math, and you'll find a focus on paying off credit cards is best.
Second, fund your matching IRA program at work on January 1, if you can. This truly is free money. If your company matches your contributions to your retirement account, the sooner you get that money (and yours) working, the more money you'll make. If you earn 7% interest from January 1st, by the end of the year, you'll have more money than if you start on Feb 1 or April 15 or any other, later date. Get your IRA funded as a priority, even if you don't have a matching program with your employer. You'll earn more on the contribution the sooner it's made.
Third, buy stocks with earnings. Keep your portfolio heavily weighted with quality stocks that have earnings growth. If you want to buy some "hope" stocks, the ones that you hope have earnings someday, keep them at a minimum. In 2008, quality will reign supreme as the subprime mess continues to smudge earnings for big banks and mortgage companies. Investors will look for the safety of solid earnings, not the promise of maybe, someday, hopefully.
Fourth, diversify across several industry groups. Buy stocks that aren't affected the same way by the economy. If interest rates go up, that will hurt financial stocks but won't make a dent in consumables or drug stocks. Balance your risks through careful planning of each stock you add to your portfolio. Do you already have a stock that will be hurt if the econony stalls? Then look at buying a stock that isn't tied to the economy. Always try to take some of the risk out of investing by diversifying across different types of stocks.
Fifth, do your homework. Too often, we buy a stock that's a tip from a talking head on TV or a good friend who knows something about a company that is sure to make the stock soar. Forget about those tips and rumors. Research stocks so you understand them well before you buy them. Then you'll know not only whether you're paying too much or getting a bargain, but you'll also know when they're overpriced and should be sold. Let someone else buy the "hot" stocks of the day. You'll do much better by investing in quality.
Sixth, pretend you can only buy 10 stocks, ever. While you can buy as many stocks as often as you like, if you realize your money is scarce and therefore, valuable, you will be much more cautious with it if you can only buy 10 stocks. It will make you focus and think carefully before committing to any one stock because that is 10% of your total investment. You'll want to add only the best stocks, ones that are worthy of your money.
Try these 6 simple steps for improving your investment returns. I guarantee 2008 will be a better year if you do.
Before the bell: Stocks futures steady ahead of GDP, housing data
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Reader Comments (Page 1 of 1)
12-29-2007 @ 11:49PM
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