Friday, November 13, 2009

Ten Rules For Successful Investing

The following is a guest post from Keith Fitz-Gerald, chief investment strategist of Money Morning .

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With all the financial woes in the global economy, the worst thing an investor can do is to freeze up. With all the ups and downs in the market, its all too easy for investors to allow their emotions to take control. Thats when the smallest mistakes turn into the biggest mistakes.

Theres one antidote for this problem remembering a few basic rules. Just embrace the 10 ideas that follow and youll be in line to make some serious money in the months ahead.

Rule Number 1. Invest on the Right Side of Major Economic Trends: That old investing adage Dont fight the Fed serves as a good example here. Rising interest-rate environments make meaningful gains difficult to sustain unless you know what to look for. Far too many investors got it wrong in the 2000-2003 and 2008-2009 periods by betting on growth stocks in a recessionary economy, and theyre still getting it wrong. Those investors are likely to get burned again should the economy slow even more, despite the government-bailout and federal-stimulus efforts. Make sure to analyze all of the other major global trends, as well and ride the ones that are truly unstoppable. Youll know them when you see them, because theyll have trillions of dollars in new capital flowing directly at them investment plays in such areas as infrastructure, inflation, energy, food, and water (both supply and purity) are great examples.

Rule Number 2. Sell Your Winners : This may seem counterintuitive, but if you want to succeed you must sell your winners. Rule Number 6 thinking like a plumber to prevent losses is only part of the success equation. To be really effective, you have to take profits, too. That way, you get more capital that you can put to work. Think of it this way Safeway Inc. (SWY) regularly replenishes the inventory in its Produce Department to keep it fresh. You should do the same with the inventory in your portfolio because, if you let your stocks sit on the shelf too long, theyll eventually go bad just like fruit thats past its expiration date.

Rule Number 3. Always Sit in an Exit Row: This rule goes hand in hand with Rule Number 2. One of the most common problems investors have is not knowing when to sell. Sometimes, theyll let a big loss get out of control (which violates Rule Number 6 ) or, worse, theyll notch a big gain and then sit on the investment so long that it sneakily turns into a loss. The bottom line is that, up or down, you should always have planned exit points when you initiate a position and enforce them with protective stops, adjusting them as prices move in your favor (but never when they go against you).

Rule Number 4. Your Broker is a Salesman . So unless you know you want to buy what he has, dont go shopping today! Wall Street is not a service business. Brokers exist for one reason and one reason only to sell you stuff and make money. from your money. And the more of your money you give to them, the less you have to make more for yourself. So buy only what you want and what fits your goals and objectives not the stock of the day the broker is pushing to meet his weekly quota.

Rule Number 5. Invest for High Yields: Contrary to popular belief, rather than investing for capital gains, you should aim for the highest possible yields and the most certainty you can find. The real secret to wealth-building is compounding small gains over long periods of time. In fact, studies show that compound returns can outperform so-called growth stocks by as much as 22-to-1. Furthermore, dividends account for a huge percentage of total returns varying studies have claimed anywhere from 60% to as much as 97% over time. So, dont ignore them!

Rule Number 6: Think Like a Plumber : Big losses like six inches of water in your living room are expensive and can set you back years. Professional traders and Im not including the risk-junkie cowboys who drove the derivatives mess to heck in a handbasket understand this. And because they do, they focus the majority of their efforts on avoiding losses, instead of on capturing gains. Its counter-intuitive, but it really makes a difference. Besides, if you keep those portfolio pipes from bursting, you wont have to worry about your assets leaking away, drip by drip.

Rule Number 7. Buy Value : Buying when the underlying value is right can mean the difference between pathetic single-digit gain and truly market-beating returns. Its hard to make money when valuations as reflected by Price/Earnings (P/E) ratios are greater than 20. More normal valuations sit in the 12 to 14 range. However, to really make money, you need to buy when valuations have been beaten down into the single digits assuming, of course, that the companys underlying value is real. Doing so puts the odds strongly in your favor and can dramatically boost returns.

Rule Number 8. Retirement is a Lifestyle Issue, Not a Monetary One : When

most people think about retirement, they think about safety. Big mistake. The single biggest problem facing us today is running out of money before we run out of life. If youve followed Rule Number 9. this shouldnt be a problem. However, if youve thought about safety and have not invested enough, what youre really doing is crippling your ability to earn future income income youre going to need in order to eat, keep a roof over your head, and provide lifelong life health care. Oh yeah, and have some fun.

Rule Number 9. Start Early and Leave Your Money Alone For as Long as Possible: This is not the same thing as buy-and-hold investing. Buy-and-hold is not an investing strategy, its a marketing gimmick and, these days, its more like hope-and-pray investing, anyway. The worlds most successful investors think Jim Rogers, Warren Buffet and the late Sir John Templeton, to name a few dont buy and hold. And I dont believe you should, either. These experts buy and manage, confining themselves to stocks and strategies that meet their specific objectives. Given that one of our critical objectives is to have our money working hard for us rather than us working hard for it, the point is that you want to start as early in your life as possible and never miss an opportunity to invest. The longer you have your money in play, the better you will be paid when youre ready to cash out!

Rule Number 10. All Investments Contain Risks But Not All Investments

Contain the Same Risks: Despite all my talk about avoiding losses, the simple truth is this: If you want to grow your wealth, you have to take on risk. Its unavoidable. Every investment involves risk the only questions are how much and under what circumstances. Remember, success is not about how much money you can make, but about how much money you keep. As such, the true secret of wealth-building is taking risk properly.

Indeed, the late legendary U.S. Army Gen. George S. Patton Jr. once said: There is nothing wrong with taking risks. But he also cautioned: Thats quite different from being rash. I completely agree. Whats more, I think that Patton would have agreed with my belief that if you want to be successful in anything, you have to take a certain amount of risk every day. Its just a fact of life.

Yet, most folks are unwilling to do so or they spread themselves too thin, and over-diversify, all with the goal of protecting themselves. Unfortunately, by doing so, these investors actually set themselves up for failure not because they take too much risk, but because they dont concentrate the risks they do take in the right places!

What are those right spots? Theyre the investments that can provide the potential rewards to justify the risks the investor has taken.

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The above was a guest post from Money Morning. thanks to them for an interesting read! Keith Fitz-Gerald (the author of the post) has also recently released his new book, so check out Fiscal Hangover: How to Profit From The New Global Economy .