It is important for the successful long-term investor to have clear investment goals, honest investment expectations, and a consistent investment strategy. It can be too easy to be seduced by “ hot tips” which are usually old news to those with money and expertise. It can be too easy to try to invest in every promising stock and then get discouraged when it takes a downturn. A good investment strategy is to set clear and realistic investment goals consistent with realistic investment expectations.
Let’s look at a real life situation. You are a successful businessperson, doctor, lawyer, etc. You make a nice, steady income and you devote easily 60 hours a week to your full time job. What time is left you devote to your family and some community activity.
Now, you have been putting your savings into the bank where you are not very happy with the rate of return on your money. However, you do not have the time or expertise to take on other investments such as property development.
So, you decide to invest in the stock market. What are your investment goals? Your first investment goal is a better return on investment capital than a long-term certificate of deposit. Your second investment goal is the possibility of the substantial gains you hear about with growth stocks. Your third investment goal is something that does not require another 60 hours a week to monitor.
Now, what are realistic investment expectations? Over the seventy-five years from 1926 to 2001 the Standard and Poor’s 500 stock index gained ten and half percent a year on the average. Small cap stocks gained twelve and a half percent a year on the average. But what is a realistic expectation for the purchase of a few stocks? A realistic expectation is that you need ten big cap stocks to get the average and you need 40 small caps. That is if you throw darts at the stock page and pick where the darts hit.
A realistic expectation is that if you invest in what you know and not in what you hear about you will do better. In the 1970’s well to do physicians were buying a leasing railroad boxcars and not investing in Tagamet, the first anti-ulcer wonder drug. The drug maker’s stock did very well while many who prescribed the drug every day missed out on the stock run up.
A realistic investment expectation is that you will need to spend at least a couple of hours a week keeping up with your stocks. A realistic investment expectation is that you are not going to add twenty hours of work to your already busy life.
So, what is your investment strategy going to be so that you satisfy your investment goals and realistic investment expectations? A sound investment strategy is to pick five stocks in five different market sectors. A good investment strategy is to pick a least one stock and market sector that you know about from work, hobby, etc.
A banker may well want one bank stock and a pharmacist a pharmaceutical stock. A reasonable investment strategy for a sports enthusiast would be a sporting goods company.
Once your have picked stocks then there is more investment strategy. If you have a small cap winner an investment strategy is to take a little profit as you go. This investment strategy says that you have not made a profit until you take a profit. Another investment strategy says to let most or all of a winner ride. The best investment strategy in this regard is to keep up with the stock and have an appreciation why it has gone up and its fundamentals predict further gains.