There is always a risk in giving or receiving investment advice. Many times do we read that an expert is making suggestions based on “what their charts show.” There may be useful information in their research but there is also a huge fudge factor. This is because the “expert” is not really giving you specific advice but only relaying what their “chart” might be predicting. Meanwhile, as the market is heading downward every day, you are wondering this, what investments should you choose right now?
General versus Specific Investment Advice
General investment advice, when it as some value, is based on past performance. For example, money invested in the US stock market and left there over time tends to out-perform other investments such as bonds, real estate or bank deposits. So, is it good general advice to invest in stocks? Yes, it is. But, in order to correctly follow this advice you need put money in an index fund that follows the S&P 500 or perhaps the Dow Jones Industrial Average. And, you need to leave it there through good years and bad. This is because individual investors are typically not very good at timing the market.
An interesting article in The Balance shows us 20 years of stock market returns by year.
Negative stock market returns occur, on average, about one out of every four years.
Historical data shows that the positive years far outweigh the negative years. The average annualized return of the S&P 500 Index was about 11.69 percent from 1973 to 2016. In any given year, the actual return you earn may be quite different than the average return, which averages out several years’ worth of performance.
To benefit from the long term growth of US stocks you need to stay in the market for at least five or ten years. This is how many years you need to stay with an investment to make it long term. So, what investments should you choose right now based on this advice? You should pick a broad-based index fund that follows the S&P 500 or Dow, add to your investment on a continuing basis and stay with the investment through thick and thin. Based on past experience, your investment will out-perform others over the years.
What Investments Should You Choose Right Now to Avoid Losing Money?
Maybe the thought of watching your investments fall in value by another twenty or thirty percent is a bit too much. And, maybe you are not so sure that the market will come back very fast once it gets done correcting. If this is the case, you are looking for ways to invest without losing any money. Bank deposits are protected by Federal Deposit Insurance. US Treasury bonds, notes, and bills when help to maturity will return you investment plus interest. Likewise, AAA and AA bonds are good ways to invest and protect your capital. However, none of these investment options compares in return over the years with the US stock market and well-chosen stocks.
Choosing Specific Investments Right Now
An ETF that tracks the S&P 500 will provide a good rate of return when held for five, ten, or more years. But, there are stocks that will outperform the rest. How to you choose them? The key is to apply the concept of intrinsic stock value. Successful investors who apply this approach are always looking for profitable stocks to invest in. They look for companies whose business models are clear and likely to provide good returns over the coming years. These investors do not necessarily buy those stocks right away. Rather they wait for a stock market correction. The company they have chosen already has an intrinsic value greater than the market price of the stock. Then, with the correction, the stock becomes more of a bargain.
A solid long term investor will typically have several promising stocks on his buy list. But, he or she will only purchase those stocks when the current price is substantially less than the intrinsic value price. Then the newly purchased stock provides a forward-looking income stream and profits for years and years.
Specific Stocks Suggested by “Experts”
Forbes has an article suggesting that you “hold your nose” and buy US stocks. They allude to the futility of trying to time the market and the value of long term investing.
If your investment horizon is over two years for investing your money, don’t sell! You will just set yourself up for the impossible task of winning a market timing contest, and realizing losses. History demonstrates that it’s better to stay in the game so you don’t miss the short periods when stocks sharply recover.
The specific stocks suggested in this article are not the high tech darlings that are household names. Rather they are companies that routinely make money and are somewhat undervalued compared to their current market price.
United Rentals: down 40% this year
People’s United Financial: Down 16% this year
These may be good suggestions but we strongly advise that rather than acting on these stock tips that you carry out your own fundamental analysis before buying and holding for the long term.
Are There Stocks You Should Sell Right Now?
This gets us back to intrinsic value as a guide to stock investing. There are stocks with great names and traditions that are no longer stellar long term investments. Kodak was a prime example. They invented the personal camera, camera film, and commercial film developing. For much of the 20th century dominated the market and then digital cameras came along and Kodak’s business model no longer worked. IBM was the king of big central computers and took a big hit from the invention of the PC and faster chips. IBM was able to transition into other parts of the computer world but they are no longer the company whose stock you should never sell. Whether the market is going up or going down, when you have a company whose business plan no longer works and whose stock value is being propped up b stock buybacks, you should probably sell and avoid future pain as the stock slides into oblivion.