Editor’s note: This is the second in a series of columns from the Blue Chips investing group.
Balance is key to high-return, low-risk investing. Most of us are not day traders, nor do we need to be. We have the added benefit of time. Due to this happy bonus, investing more in stocks (versus bonds, the money market, or other options) is the most appealing option. Returns on stock investments are on average greater than returns from bonds or the money market after a maturation period of 20-30 years. Granted, many of us cannot foresee holding on to anything for 20 years. Stocks in more volatile sectors (including technology) may not even last five years. This is why portfolio diversification is essential. Whatever the fluctuations in specific market sectors (or even markets as a whole), the investor wants to be able to last through the long term. For the college student, investing is not a wrestling match but a marathon.
Faced with a dazzling array, the uninitiated will focus on a single pick and pray. Do not follow them. Even with a limited amount of capital, newbie investors should choose options that are spread out across the market.
Obviously, choosing only stocks from a single market sector (e.g. consumer goods, tech, real estate) is not a wise decision. However, there are other, more subtle ways in which the investor makes his portfolio vulnerable. To maintain balance, the savvy investor should consider some questions about his portfolio.
How and where does each company generate its revenue? If two picks in different sectors depend on one customer base, for example, then any shift in that particular base will affect one’s portfolio twofold. In other words: knowing who is buying from a company is as important as knowing what it sells, and as is knowing when they will stop paying so much.
Who is in charge? In a time of senseless mergers, it is wise to consider the management of one’s holdings. Incompetent management in one company may reflect on any companies that share executives. One should pause before buying into any corporation merging (and thus swapping big shots) with another in a totally different industry. Mergers always have motives. Conglomerations skew the diversity of a portfolio and often point to desperation (or folly) on the part of corporate management. Remember AOL-Time Warner? Your kids won’t.
Which companies are debt-heavy? Financial institutions and starter companies may have legitimate reasons for accruing debt. Others may merely be looking to boost their bottom line at the expense of the investor. However, if an investor strongly believes in a company that is currently battling debt issues, that brave individual should also round out the portfolio with several spot-free picks. Debtless companies can be found in most sectors, even tech, and are well worth the effort. A copy of a company’s annual report should provide essential debt information and is often freely distributed to potential investors.
Time and persistence are your weapons. The current economy does not necessarily limit one’s options. As a new investor, this is the time for buying low, buying well, and buying in variety.