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Diversification Or Not In The Coming Years

Diversification is supposed to protect your portfolio in up and down markets. However, for many investors diversification did not work last year. What do you do going forward?

How Diversification is supposed to Work

Diversification is based upon reciprocity, the law of averages, and the faith that the stock market will keep going up over time. The assumption is that when the price of oil goes up, for example, industries that use a lot of energy will have higher overhead and make less money whereas the oil, coal, and natural gas industries will make more money. So, if you practice diversification over several sectors you will protect yourself, so the assumption goes.

So, why didn’t diversification work last year? Basically it is the faith part of the equation. When investors lost confidence in the system in the face of a bear market and recession they pulled their money and the receding tide lowered all ships. Yes, big oil still had a great year but that was because of profits through the first part.

So, What’s Next with Diversification?

For the time being it is probably best to invest on a stock-by-stock basis. Until more money reenters the market and a trust level builds again some of the old rules will likely not work.

Right now everyone is trying to outguess the system as signs of recovery from the recession emerge. We see the recovery market going up and we see profit taking. Strong companies with cash will survive and, if not already bid up, are good long-term investments. Diversification may work again in a couple of years but we will need to see more stable economic picture first.

Down the Line

It is likely that as the recession rights itself that in bull and bear markets a strategy of diversification will work to a degree. The “take home lesson” from this may be that in long term investing as well as short term investing one needs to pay attention to each of ones stocks. What was a well-run company with an excellent product line one year may become second rate after a takeover and poor management. A leveraged buyout may temporarily raise a stock price and leave the company weak and non-competitive. Buy and hold works if you keep paying attention to what you are holding. A periodic review is always in order, reading those quarterly reports and what experts are saying about the near and long term prospects of any given stock.

The recession will be gone in a year or maybe less. Now during the recovery is the time to be making wise long-term investments in stocks that are selling below their long-term market value. Reassembling a sound portfolio with an eye towards diversification is not a bad thing but for now the best stocks in the strongest sectors is probably the way to go. After the recovery, when the market is back to normal look at balancing your portfolio.


Ever Heard Of Futures?

Have you ever heard of futures and the ability to enhance profits with the candlestick charting technique? There is a difference between the stock market and futures. In futures trading, you don’t really own anything as in stocks. When trading you are merely making a bet in which direction the future price will go. If you use the candlesticks technique, you should make relatively good money with a little common sense.

There are several candlestick charting techniques that can be used to predict which way you should go to buy or sell your investments. The Doji comes to mind. If the open and close are very close together or the same, that means that the bulls and bears are at conflict and should alert the investor of a major indecision. Now, if the Gravestone Doji is formed at the open and closes at the low end of the day, occasionally it signifies the bottom of the markets. The reason it is called this is because, it looks like a gravestone. Another of the candlestick charting techniques is the long-legged Doji.

Most Japanese believe that the signal of the long-legged Doji has lost is sense of direction and to use extreme caution. Now the Bullish Engulfing Pattern is usually formed at the end of a downtrend. A white body is formed that opens lower and closes higher. This means the buying frenzy disperses the selling pressure. How does this candlestick charting technique turn potentially money eating probabilities into money-making trading profits? It’s like this, the factors of signals can be made to align elements that make optimal option trades, signals, market direction and many other factors.

A few other factors to consider are direction, magnitude, and time. In direction, you study the candlestick signals. As you figure them out, your accuracy will vastly improve your chances of making excellent choices in your investments. Now in magnitude, you will analyze a stock trade and its potential price movement. One will need to look at the speed and magnitude of the move before it can be considered be a reversing factor. Another thing to look at is the congestion levels above the reversal area. Now on to time, which is the weakest area of the candlestick charting technique, probably due to human weakness and impatience.

Time and emotion are two factors that cause investors to lose their money in at least 80% of their investments. Try not to let emotion get in the way and use the Japanese candlestick charting method to make money off your investments.


Dispassionate Investing In A World Of Despair And Hope

We are living in the world of the old Chinese curse, “interesting times.” With the economic mess the world is in, we see despair alternating with hope every day. This fact is reflected in stock prices almost daily. Now, of all times, is when successful investing requires a dispassionate approach to market psychology as well as your own investment psychology.

Bulls, Bears, and Successful Investing

The investment psychology of bulls is that they live in the hope that the market will always recover and that prices will always go up over time.

The investment psychology of bears is that they live in the despair, or pessimism, of the contrarian. The successful bear believes in dispassionate investing and tries to play market psychology to reap their profit.

Bulls can get wiped out when companies fail and bears can get caught short and lose everything. So, it would seem being purely a bull or purely a bear is not the way to go.

Market Psychology

Everyone is prone to despair out of proportion to the events of the day. Everyone wants to live in hope of a better tomorrow. Couple these natural human propensities with the anxiety that comes with trying to outguess market psychology when things are chaotic and you will most likely develop ulcers. You live in the ancient Chinese curse, “May you live in interesting times.”

When the market psychology of despair drives down the stock price of sound companies, it’s time to put aside despair and buy for the long term. When the market psychology of misplaced hope drives up the price of poorly run companies based upon a snippet of news, it’s time to get out of the stock. If you think the company has promise, perhaps it’s time to place a buy order at a substantially lower price.

Investment Psychology

In general, sound investment plans and investment strategies are good. Investment psychology tends to be bad. Investment plans and strategies are usually devised when you are cool, calm and collected. Investment psychology tends to kick in when times are crazy. Investment psychology tends to make you one with the whims of the day. Investment psychology tends to lose you money.

The Media, Hope, and Despair

The media have their own agenda, which is to sell newspapers or to get you to watch the ads on their television stations. This author can recall when the major news media switched from dispassionate reporting of the news to hyping the news near the end of the Vietnam War. “News at 6 and pictures at 11” became to teasers to get you to tune in later. The media thrive on reporting, and often creating, hope and despair, often on the same issue in the same couple of days. Dispassionate investing avoids the media’s attempts to play with psychology, YOUR investment psychology, like the plague.

Dispassionate Investing

The point of having a system, or investment plan, is to take advantage of market psychology, minimize your own investment psychology, and engage in dispassionate, successful investing.

Stick with your plan. Execute your plan. Re-evaluate your plan as needed. Market psychology will often drive prices to you. You do not need to respond to your own anxiety by being busy. You do not need to buy or sell based upon anxiety. Patience in execution of your investment plan is the key to dispassionate investing.


Long Term Investing In Basic Consumer Goods Companies

As 2009 begins the United States is experiencing its worst economic crisis since the Great Depression. In these tough economic times where is the best place to put a long term investment? It has always been good advice during a recession to put your long term investments in banking or basic consumer goods. Well, banks are getting bailed out themselves so that leaves basic consumer goods. People always buy hand soap, toilet paper, dish soap, and laundry soap. The basic consumer goods companies keep making money and paying dividends through good times and bad.

Long Term Investing in Basic Consumer Goods

Companies such as Proctor and Gamble tend to do well in all economic times. People always need and buy basic consumer items. Those interested in patient long term investing in companies such as P&G and 3M will usually see quarterly dividends and a slow steady appreciation of the value of their portfolios.

Proctor and Gamble, as an example, makes 12 Billion USD a year and pays dividends of about 2.6% on invested capital. These folks are considered the best managed company in the United States year in and year out. Besides doing business in the United States P&G, 3M, and Clorox do business throughout the world. And, yes, no matter where you go people still buy basic consumer goods in good times and bad. Owners of basic consumer goods stocks usually get their dividend checks every quarter.

When to Make a Long Term Investment in Basic Consumer Goods

One might have expected that consumer goods stocks would be at the high end of their trading ranges considering that the United States is in a recession and has been for a year or more. However, P&G is trading in the middle of its range. Thus a long term investment in this basic consumer goods stock will not be initiated at the high end. Unlike other sectors such as autos and electronics people will not shy away from buying hand soap or toilet paper because of a somewhat higher price. It is unlikely that basic consumer goods stocks will need to get bailed out like the Wall Street firms in the news.

Bailouts and Basic Consumer Goods Stocks

Because of the stability of basic consumer goods companies they don’t need bailouts and will not be subject to increased government regulation or oversight. Long term investment in these companies will probably just keep making you money. Long term investments in companies that are NOT in the news is a good thing. The main place you find news about consumer goods companies is in the business section when they report their dividends.

A Last Thought on Long Term Investing and Market Timing

For the time being put your capital where it has the highest potential of being safe and will give your long term investments a steady rate of return. When you think the recession is halfway over, and other stocks start moving up, do not move all of your assets at once. The old pros always suggest that you leave a portion of your long term investments in something solid. This has always been sound advice, once again proven true in the last few months. Long term, patient investing, especially in solid consumer goods companies, pays off in the long run.

Long Term Investing In The United States Infrastructure

The United States Interstate Highway System is in need of infrastructure repairs. The timing is just right because the United States is in need of a jobs program too. A long term, long overdue investment into the United States infrastructure from transportation, to electric grids, to sewers is coming. Savvy long term investing in United States companies able to provide products and services for infrastructure repairs will reap rewards through the recession and for years to come.

Transportation, the Interstate Highway System, and the United States Infrastructure

All infrastructures, transportation included, need maintenance and replacement. The United States transportation system is no exception. The initial components of the United States Interstate system are sixty years old. It was championed by President Eisenhower who experienced a pre-interstate trip of several weeks by military truck convoy from the East to West Coast in 1921. The United States rail system dates back to the 19th century. Some bridges, like the one in Minneapolis, are falling down.

An efficient transportation system not only benefits the nation, but creates and maintains jobs. Hydroelectric dams provide non-polluting electricity. Mass transit systems save time, energy, and urban space. Modern, well maintained, electrical grids provide the electricity that modern life depends upon without perpetual brownouts.

Fiber optic, as well as old copper wire, telecommunications infrastructure have changed the speed of world communication. United States competitiveness depends upon continuing updates and maintenance to its infrastructure.

The Economic Crisis, Politics, and Long Term Investing in the United States Infrastructure

Over the years much needed updating and maintenance of the United States infrastructure went begging as tax breaks were handed out or money went for military spending and other hot issues of the day.

However, the dismal economy and the need to get people back to work are the issues of today and politicians want to be seen dealing with these issues. An possible ideal solution already being proposed by the Obama transition team will focus on the rebuilding of the United States infrastructure.

Long Term Investment in Companies Involved in Infrastructure Improvements

Infrastructure includes roads, bridges, hydroelectric dams and irrigation systems, railroad mass transit systems, airports, the entire air traffic control system, concrete, steel, fiber optics, computer systems, satellite systems, electrical grids, water and sewer systems, and more.

So, it’s time for a little homework. It is likely that at some level, work on rebuilding the United States infrastructure will be bid on in such a way as to prevent the money spent from going overseas. Foreign owned companies will probably need to manufacture in the United States to be involved in United States infrastructure improvements. So look for US companies and foreign companies doing substantial manufacturing in the United States.

There are two approaches here. One is very generic. There will be lots of cement poured with steel rebar. Thus any well-run company making Portland cement or a modernized, efficient steel company will be a good long term infrastructure investment bet. A less obvious but strong infrastructure investment might be with a company like 3M that creates the coatings for many road signs.

The non-generic approach has to do with anticipating a need and finding and investing in the company that provides the solution. With the continuing issue of homeland security, a computer program that improves the scanning, cataloging, and tracking of cargo in and out of US ports could be a winner. Those interested in long term investing in the US infrastructure are invited to do the research, buy the stock, and possibly prosper for years to come.

Long Term Investing In Pharmaceuticals

Long term investing in the pharmaceutical industry has generally led to excellent returns. The standard advice over the years has been to buy “big pharma” and watch your shares rise in value while you collect dividends. In the last twenty or more years the number of new technologies being applied to treatments has grown exponentially. A question for long term investing is whether investment in one of the larger companies is your best bet or if a little homework and investment timing will allow you to take part in the early growth of new companies associated with new technologies.

Long Term “Buy and Hold” Investing in Pharmaceuticals

The names may change with mergers and acquisitions but the basic nature of the game in big pharmaceuticals stays the same. A company develops a medicine and then holds the patent for a few years while it recoups its investment costs and takes a healthy profit. Typically the Mercks, Lillys, and Glaxos of the world will find a variation on a current medication and develop that variation in order to extend their patent rights and profitability.

Because of competition from generic drug makers when a drug goes off patent the major pharmaceutical companies need to be active in research or acquisitions in order to have a stable of profitable drugs to sell. “Buy and hold” long term investing in pharmaceuticals presupposes that the big pharmaceutical company will keep replenishing its stable of profitable drugs.

Because of the increase in new technologies in the pharmaceutical world, a well run pharmaceutical giant can continue to be a cash cow into the distant future. The question for long term investing in pharmaceuticals is whether a little diversification, homework, and investment timing might not pay off even better than less thoughtful long term investing strategies.

Long Term Investing in Pharmaceuticals with Investment Timing

Much of the basic research in pharmaceuticals occurs in small startup companies. For long term investing to succeed in this realm one needs to be lucky, to be very diversified, and to do one’s homework. On this page we suggest homework and investment timing. The obvious point is that you want to get in at the lowest reasonable price.

In the United States there are a number of tests that a drug must pass in order to be approved for use by humans. Here is where investment timing for long term investing comes in. The point here is to get familiar with the testing process, namely New Drug Applications plus Phase One, Two, and Three trials as well as Phase Four when required. Stock prices fluctuate greatly just before the results of one of the drug trials is about to be announced. For long term investing the point is not to jump in and out of a stock but to time your purchase by putting in a well researched buy order.

Long term investing in a winning company can lead to excellent returns. There is no reason why one should lose out on a four-fold gain at the beginning because of poor investment timing.

Another advisory is that drug startups are very technical. It is wise to do your reading and to stick to one or two technologies. Long term investing in this area can be very lucrative. For example, patentable stem cell cures for diabetes, degenerative joint disease or Alzheimer’s disease will make a lot of people very rich as well as provide new lives for millions, if not billions.

Long Term Investing In The Coming Years

As we enter the New Year and look back at the detritus of the old year it’s time to evaluate long term investment opportunities. Three categories come to mind for long term investing. These are United States infrastructure improvements, pharmaceutical research, and consumer goods. The new administration is going to pour money into infrastructure to create jobs. With an aging population any new regarding more effective medications will always be welcome and potentially profitable. People will always need soap, toilet paper, and other basic necessities.

Long Term Investments in the United States Infrastructure

The Obama administration has promised to pour money into roads, bridges, and other US infrastructure components in order to main competitiveness and especially to create jobs. Companies such as Caterpillar will benefit from increases in road construction. There have been calls for increased funding for road and bridges for years as the Interstate Highway System has aged. We don’t expect a new WPA but rather funding through the usual channels to revamp old infrastructure and put people to work. An endeavor of this magnitude will take years to complete and will reward patient long term investors.

Long Term Investments in Pharmaceutical Research

The overriding demographic in the USA is the aging population. With aging comes diseases of aging and the need for pharmaceuticals to treat these diseases. Whether it be the genetically engineered marvels of recent years or unique antibiotics discovered in nature, long term investing in pharmaceuticals that reliably treat diseases associated with aging will reward patient investors. Those interested in long term investing can expect rejuvenation of stem cell research when the Obama administration lifts restrictions on the use of cell lines. Research for cures to Parkinson’s disease, Alzheimer’s disease, and diabetes will proceed faster. The possibility of stem cell transplants providing a cure for long term heart failure increases the likelihood of longer healthier lives. Targeted investments in genetic pharmaceutical research will reward patient long term investors.

Long Term Investments in Basic Consumer Goods

Companies such as Proctor and Gamble do perfectly well in most economic times. People always need and buy basic consumer necessities. Those interested in long term investing in companies such as P & G and 3M will see dividends and a slow steady appreciation of the value of their portfolios. In general, banks and consumer goods do well during recessions. This time you can write off the banks, at least in the USA. Consumer goods companies will, however, probably provide patient long term investors with a steady return and appreciation.

Long Term Investments and Timing

For the time being put your capital where it will be safe and have a high probability of giving your long term investments a steady rate of return. When you think the recession is halfway over, and stocks start moving up, don’t move all of your assets at once. The old pros suggest that you leave a portion of your long term investments in something solid. This has always been sound advice, once again proven true in the last few months. Greed kills. Long term, patient investing can pay off if done with common sense.

Why Buy Stock?

Prospective businessmen and women will have to answer the question of why would anyone in their right mind buy stocks? As a matter of fact, the real question should be why someone would opt to not buy stock? Possessing stock in an organization means that you own stock with that company. You are invested, even if only a little, in that company whether it succeeds or fails, and that is why you own a part of the company.

A lot of people buy stocks for various purposes. For every person trading, there is a reason for purchasing stock. A few individuals try to get their hands on a majority of stock within an organization so that they possess an element of control within the company. This is not always true, but in most companies, investors who own a large amount of stock do have some say in the decisions made concerning the direction of the company because the company is responsible to those who own shares.

Some people desire to be a part of a company that makes an item that they have faith in. Chocolate is a strong favorite of mine. From my perspective it makes complete sense to purchase Hershey stocks. Chocolate lovers would agree this stock has a solid future and potential for new products, with an emphasis on expanding internationally to new markets. Before buying stock these are variables for individuals to consider. But, I fully realize that with Hershey stocks being so established, I will only have minimal earnings on my few stocks. When all is said and done though, this type of stock is solid and will produce revenues year after year. This is not a fast mover but one that stays with me for the long haul and looks good in my portfolio. To put this in perspective, some individuals will buy stock due to the fact that they enjoy the product.

The main objective of the day trader is to make a profit, but some also do it for the thrill of the hunt for that moment of triumph on the stock market. There are people who purchase stocks to make a lot of money, and there are people who want their investments to make them money right away. When compared to conventional retirement funds, with their long lines of people staying indoors awaiting the long term payoff, day trading is more like a fast food drive-through kind of investment.

There are tons of reasons for investing or purchasing stock. What you should be asking is why people purchase specific stocks; the answer to that question is as unique to each person as is each stock they buy. There is no blueprint for success, but there are many things you are able to do to reduce the risks of failure when investing in stocks and bonds.

The library should be the first place any potential investor goes to. A wide variety of books are available that can explain the history of stocks, financial planning and provide information on how to go about building a portfolio. You can find a reputable stock broker and develop a strategy once you develop some questions and use your savings.

Reasons To Invest

Most people consider that an investment in the stock market is a method of obtaining goals to retire and nothing else. But this is very far from the truth. Many people invest in stocks looking more at the short term picture than the long term. The following examples should give you some inspiration in case you have not looked into the positive result of smart investing in stocks and mutual funds.

  1. Buying the home of your dreams. Being able to pay cash is not absolutely necessary, but imagine how amazing it would be to pay off a house immediately. Naturally, down payments are good to have, too. The more money you can put down, the lower your interest rate will be. That means you will pay less over the life of your home. This will create instant equity for you and make your home more valuable.

  2. Giving your kids a college education. While not as far down the road as retirement, it is a longer term investment. We all dream of sending our kids to college, but the idea of planning for retirement is a little harder to grasp. However, many of us are not sure how to give our kids the college education that we desire for them.

  3. Medical expenses such as braces. When you have children, you need to be aware there will be unexpected medical and dental expenses. Even though you have a good insurance company, you will probably have some bills to pay along with deductibles and the extra payments that may be incurred. It is certainly beneficial to have some money salted away earning interest to help you handle these situations.

  4. Taking the vacation of your dreams. There are always things we haven’t done, places we haven’t gone, sights we want to see, but haven’t yet. Too frequently, people concentrate all their efforts on their long term goals, and forget to enjoy life today. Our children are only little once. If you are going to take them to Disneyland, you should do it while they are young. Then they can have fun and and the fond memories that go with it. The wonderful memories they will have of the time spent with you are priceless and more than enough reason to invest your money in this way.

  5. Emergency funds. Things will happen in your home that will be unexpected and costly. If you just keep your money in the bank, the interest rate will be very low compared with other investments. So by investing the money, it will be working harder for you. When you need it for an emergency, it will be waiting for you, and it will have grown a bit more. That will really help you to handle those unexpected emergencies.

So, even if you are not investing for the common reason of securing retirement, there are a myriad of other reasons to invest. If you have never thought of the reasons listed here and along with others that aren’t, isn’t it time to start now? There is nothing to keep you from building your future by starting to invest now!

Stocks vs. Mutual Funds

Some may think the idea of comparing stocks to mutual funds a little odd, since mutual funds are commonly made up of stocks, bonds, or some combination of both; it is necessary to compare the two when it comes to choosing which is best for your financial future. Below we will discuss some of the primary differences so you can make an informed decision about which choice best suits your financial needs.

Mutual funds are the best option for the everyday man or woman looking to invest. The high costs associated with buying, selling and trading stocks can eat up a significant portion of any profit. These fees are often used to divert the trading of stocks, instead of encouraging it. Contrarily, the big trading companies afford large discounts for their clients who spend more, making the stock market trading game seems more exclusive by making it easier for those who have a great deal invested than they make it for someone who is new to trading. Mutual funds offer easier access to those who don’t have a large disposable income to invest and need to take baby steps (such as $100 per month) toward their financial goals.

There is usually less risk when buying a mutual fund than with buying individual stocks. There are a lot of different reasons why this occurs. The first thing to consider is that mutual funds are not commonly invested in one sector, industry, or company. Therefore, if a particular stock performs poorly, the profits from the fund’s other investments will help balance out the loss and lessen the blow. This means any potential loss is actually shared by a large group and thus when a loss actually occurs, it will have much less negative impact than if you were the sole owner. The fact that the funds are already diversified helps protect from huge changes in the market like those seen recently when the sub-prime mortgage industry went belly-up, leaving many investors ducking for cover.

Share the riches. Spread out the risk. Mutual funds give a feeling of community, unity, and shared risk for those who buy into a particular mutual fund. In most cases this is an advantage since it allows a lot of investors to carry significantly less risk than if they purchased individual stocks on their own. There is a fund manager with extensive experience dedicated to managing the fund and doing everything possible to ensure it’s profitability. You will not see this if you are investing in stocks. When it comes to the stock market, the only people who care about how well your stock is performing are those that you pay such as your financial advisor, accountant, and/or stockbroker.

You should also be aware that mutual funds can be traded and/or used more easily than stocks. They are also cheaper to trade. A local bank, on the internet, and from online trading companies, and even at a company 401k plans are many places you can buy mutual funds. In simple terms, mutual funds try very hard to be accessible to everyone. Most importantly, when it comes to purchasing mutual funds, devote some time to researching the history and performance of the fund you’re thinking of investing in, in addition to the fund manager for your peace of mind.

There are many differences between mutual funds and stocks. For a small time investor, mutual funds are a good option to explore. For the small investor, mutual funds are commonly the best way to go since they are less risky, have less fees, and allow the owners to gain a slow and steady return on their investments.


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