What is your time horizon for investments? Are you investing to fund your retirement or build a family fortune? Or, are you looking to increase your current income with stock dividends. What you invest in depends to a degree upon your time horizon.
In the late 1980’s when Japan’s economy was booming one of their power companies stated that it made its basic decisions based upon a three hundred year time horizon. Certainly if you are building nuclear power plants you would like to know that three hundred years from now your spent fuel is not polluting the environment.
Now, how about investing. Three hundred years? At the speed at which society and business change some of us are happy to make decisions that turn out well after three years or even three months!
On a practical basis the long term investor needs at least to do a weekly check of his or her holdings, general market conditions, outlook for the market sector you are invested in, and political and market psychology considerations that may require you to divest yourself of a stock or buy more shares. This time horizon has to do with maintenance and planning.
If you are investing in growth stocks you hope is to buy an emerging stock in an emerging market niche and hold it while the company grows, matures, and becomes a reliable stalwart in the economy. However, the tricky part is picking the right stock and buying at the right time. Buying call options on hot pharmaceutical startups takes a little bit of the guesswork out of things as you exercise the option and buy only after the stock has made its move. But, you still need to pay attention. This is a weeks or months time horizon.
If the same stock flourishes after the development of a successful cancer cure or “killer app” piece of software you will see spectacular growth in that stock. However, what happens when the stock matures? Microsoft is a case in point. Microsoft is very stable, pays dividends, and never seems to move much. This is a different stock than what people bought years ago. So, do you count your blessings that an initial $10,000 investment is now worth a million dollars and pays a yearly dividend larger than your initial investment or do your sell when stock growth disappears. This may be an investment time horizon of many years or it may be one of months.
Of course there are stocks that have spectacular growth and, when the second possible cancer cure does not pan out, experience a sell off despite steady growth and earnings. This goes back to your weekly time horizon and having a well thought out plan for each of your holdings. By the way, write down what you will do with each holding, in a given time horizon, and why. Not only does this exercise make you think but it helps keep you honest with yourself.
Standard advice is to diversify your stock portfolio and to diversity your portfolio as regards time horizons. If you have a busy, full time job you do not have the time to follow a dozen or more active growth stocks and do it well. You will make mistakes and either lose money or lose out on an opportunity.
You need to decide how much of your time and life you will devote to property watching your investments. A good plan is to write down on a piece of paper how much time you will invest in your stocks as well as how much money and go from there.