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.