Stock Investing Strategies for the Long Term
June 19, 2009
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” – Warren Buffett
If you think of day trading as a series of one night stands, long term investing is that one that sticks. Whether it’s a bad rash you can’t get rid of or the love of your life, these are long term relationships where you meet the dysfunctional family and all the friends and baggage you didn’t expect.
Long Term Investing
Most investment professionals would consider five years long term. When it comes to investing using individual stocks, it can be a bit more expensive and potentially more risky than using an ETF or mutual fund. Mutual funds or ETF’s can help facilitate diversification and protect your portfolio when the market gets choppy.
There are just as many believers in diversification as there are opponents of the philosophy. Opponents will say that an investor should buy a stock that they believe in regardless of industry or sector. It’s a plausible idea, but how would you feel if you believed in three of the top financial companies two years ago. These were very popular stocks, with great track records and dividends, but then…
The idea behind diversification is that where one sector or industry is under-performing, other industries will usually perform at a better rate. A good starting point for a portfolio is 10 individual stocks or ETFs. An investor must still do their due diligence to pick the right sectors and/or stocks. There are two ways of doing this: top-down or bottom-up.
When you hear about a money manager or a mutual fund the analyzes stocks using a “top-down” process, this means that they first decide what sector or region they feel will out-perform the market. Once they decide the sector, then they research the individual stocks inside the sector in order to choose the right one for them
This is the exact opposite (obviously) of Top-Down. In this scenario, you choose individual stocks based on your own extensive research regardless of sector.
Buying Stock via ETFs
If you’ve decided on a top-down approach but you can’t decide which healthcare stock you want, you can look into ETFs to fill the void. With ETFs, you are purchasing every stock in that sector/index. With a healthcare ETF for this example, you are filling the sector and getting diversification in the process.
Top Down Example
Here’s an example of a portfolio that might represent a top down strategy, each of the stocks is from a different sector. Let me be clear in saying that no research went into this sample portfolio, it’s simply an example to demonstrate stock from various sectors.
- Apple Inc. (AAPL) – Technology – Computers
- Wells Fargo & Co. (WFC) – Financial
- Johnson & Johnson (JNJ) – Healthcare
- Chevron Corp. (CVX) – Basic Materials
- Coca Cola (KO) – Consumer Goods
- Dow Chemical (DOW) – Chemicals/Major Diversified
- Walmart (WMT) – Services – Discount/Variety Stores
- General Electric (GE) – Conglomerates
- Boeing (BA) – Aerospace/Defense
- Utilities Select Sector SPDR (XLU) – Utilities Sector ETF
Again, this is just an example of ten holdings pulled together to show a diversified portfolio. These are holdings that you need to look at with the idea of holding them for extended periods of time.
Monitoring Your Stocks
Keeping an eye on your holdings is very important. There may be a holding that increases significantly in value for a specific reason and overweights your portfolio in a certain sector. Taking profits in situations like that may be in order. By that same token, if a stock drops suddenly, but you believe it is still a strong company, you may want to double down and buy more shares on that dip.
One other final thought, most of these companies do give dividends. You can either re-invest those dividends back into that particular stock and buy more shares or take the cash and use it to take advantage of other opportunities.
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