Over the last couple months we've cleaned out the losers from our
portfolios. Enough dumping! For you long term investors out there
with some
extra loose cash (you don't need for paying bills), it may be time
to think
about adding some winners back into your basket. Now don't rush
-- the
market downturn will be around for a while yet. However, there are
many
bargains out there and you can get "more for your money"
with today's
prices.
Know Your Plan
First of all, it's important to make a plan: How much do I want
in
aggressive growth, quality, and so on. Then invest slowly, by dollar
cost
averaging because the market's ups and downs will always be with
us. And it
goes without saying: DO NOT BUY ON EMOTION! That's a disaster in
the making,
for certain.
You always need to ask questions about a company's long-term prospects:
Will
it still be around in 10 years? What about current management? Do
I
understand its products and business and is it appealing to me?
Who is the
competition? How are earnings (both for last year, and projections
for the
future)? Past performance is no indication that the company will
do well in
future years, but it is an indicator since the company has been
around for a
while.
There are so many ways to choose stocks. Perhaps you want growth
companies
that have increasing sales, earnings and prospects for continued
growth, in
steady growing industries. Growth stocks tend to attract investors
because
of their exceptional earnings.
You might choose value stocks. They are selling cheaper than growth
stocks,
but have undervalued assets, such as cash in the bank or real estate.
Still others might choose both growth and income. This would include
stocks
that show a growth potential, plus paying a dividend.
Benefit from DRIP Investing
Then, of course, you need to decide when and how you want to buy
these
stocks. My style is long term and I want quality and dividends whenever
I
can find them. I have many DRIPS and I reinvest these dividends
and add to
the stock on a regular basis through OCP's (Optional Cash Payments).
Dividends do matter and they can increase your portfolio's value
over a long
period of time. But DRIPs are not for everyone. If you need money
in a short
time frame, you may find DRIPs don't work for you. For the long
term,
however, they work very well.
If you need income each month, consider buying some bond funds
(I own
Vanguard GNMA, for example, which pays a dividend each month which
I
reinvest it into my account.) If I need this money for living expenses
in
the future, I can request that the monthly dividend be sent to me
instead of
reinvesting it. In the meantime, I am building the amount of shares
I have
and won't use it unless necessary.
Some of you have bought large companies thinking that they would
always be a
good investment, yet you've found that suddenly many of your stocks
had
several devastating earnings reports, or just announced massive
layoffs, or
their top management departed for no reason. This is a good reason
to
diversify your portfolio, no matter what type of investor you are.
Buying
only one sector, such as tech, can be disastrous, as we have seen
in the
recent market action. I lost money (on paper) in my tech stocks,
but I
gained in other areas: retail, energy, drugs, customer service and
financials.
Buy What You Know
As Peter Lynch said, "Buy what you know." If you're familiar
with a
company's products, say Procter & Gamble's (NYSE: PG), or if
you use the
supplies of another's, maybe Home Depot's (NYSE: HD), then you would
be
buying "what you know." I invested in Sara Lee (NYSE:
SLE), for example,
because I like their breads, bagels and frozen goods. I used Walgreen
Drugs'
(NYSE: WAG) mail-in prescription service and knew it to be efficient:
I
invested. I put money into Merck (NYSE: MRK) because I was familiar
with
many of the drugs they produced.
Now, it's a bit more difficult to know all about the tech you might
want in
your portfolio, but this is why homework is important. Those of
us who use
computers might be familiar with the chip name in our machine (Intel
(Nasdaq: INTC)). Maybe we use Microsoft software (Nasdaq: MSFT)
, on a
Compaq computer (NYSE: CPQ), print with a Hewlett Packard Laser
(NYSE: HWP),
and connect to the Internet on cable through Cox Communications
(NYSE: COX )
. There you have five tech names of companies you are familiar with
because
you use their products.