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Invest for the long term

Even in the past 10 years, the Market has appreciated. You can expect that over 20 - 40 years, your investments in the stock market will grow. However, it is impossible to time the market. While the Market is on an upward trend, this is not a constant climb. Sometimes, the Dow Jones falls. It may take five years for a stock to recover from a fall.

Diversify

You can never tell what will happen to any one company or industry. While the Market as a whole will appreciate, there is NO guarantee that any one company will appreciate or even stay in business. It is a good idea to spread your investments among different companies, industries, and even different stock markets. Not all industries or markets move in tandem. For instance, the Asian market may be experiencing an increase in overall stock prices, while the US market is falling.

Research

If you are picking your own stock, be sure to research the company and review the financial statements. You want to make your decisions based on the health of the business, not the latest tip. Always be skeptical. If the stock of an Internet company is rapidly increasing, find out why.

Consider risk

Consider the risk you wish to face in your investments. A certain percentage of your investments should be in safer, more conservative funds, while the rest can be invested in more risky ventures. The following formula may help you to determine the percentage you should invest in stocks. 100 - your age = percentage you should invest in stock. If you want to invest more aggressively, you can subtract your age from 120.

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Consider tax implications

Consider the tax implications of each investment decision. You may want to be sure to invest the maximum tax-free amount that you can invest in an IRA. One possible mistake is to sell your stock within a year of purchase. If you sell stock within a year, then any profit will be taxed in the bracket for short-term capital gains. If you wait for longer than a year to sell stock, the profit will be taxed in a more favorable bracket because it will qualify as a long-term capital gain. Taxes can greatly diminish the returns on your investments.

Try to avoid the following:

  • Do not try to time the market. Even the professionals aren't able to make a fortune by day trading.
  • Do not blindly follow "hot tips". Often, these tips can be rumors spread by biased parties so that the stock price will increase.
  • Try to avoid high fees and commissions. Try to minimize activity. Avoid the belief that you get what you pay for. You can find the services you need at a reasonable price.
  • Avoid Initial Public Offerings, or IPOs. It is often difficult to tell how these stocks will perform. Statistically, IPOs do not perform as well as stocks that have been on the market for a while.
  • Do not put too much faith in the reviews of analysts. Most stock analysts work for brokers. These analysts want to encourage you to trade. The unspoken rule is that these "experts" will never give a negative review about a company. These people just want to encourage you to buy stock.

Online problems

  • Again, you should not use online trading as a tool for day trading. There will be times when you can't access your account. You could be away from your computer when the market makes a major move. Your Internet connection could be down. The online brokerage firm's server could crash due to heavy trading, unexpected software glitches or a natural calamity. If you must make an immediate trade, try the firm's alternative trading options. This could include automated telephone trading or calling a broker.
  • Just because you click "buy" doesn't mean that your stock or mutual fund will be purchased at or even anywhere near that particular moment in time. Sometimes -- particularly during heavy trading periods in the markets and as a result of computer problems -- your online order will be processed minutes or even hours later. As a result, an order for stock at $10 per share could go up (or down) by the time your purchase is actually executed.
  • You can access your online account at any hour. However, the information on stocks will not be updated until the market opens. Your orders will not be executed until the market opens. You can only send orders. The activity does not happen unless the market is open. The information on stock prices is not constantly updated. It is only updated while the market is open.

The best way to avoid these glitches in online trading is to invest for the long term. If you invest in the long term, you do not have to worry if you can't establish an Internet connection at 10 at night or 3 in the morning.


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This page was last modified on 08/15/2001.
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