It’s a New Year and the season when most of us make resolutions that look really good on paper, but don’t withstand the test of time. Most hopeful intentions such as losing 10 pounds, drinking just one cup of coffee or one glass of wine a day, or exercising three times a week—you get the picture—don’t last a week!
And the picture for our financial resolutions is just as dire. Whether it’s saving and investing 10% of our income or vowing to rebalance our portfolios quarterly, financial resolutions often fall by the wayside.
Most experts agree that these big goals are often abandoned because they seem so goliath and overwhelming. We all understand that they can be achieved in what the pros call ‘baby steps’ or one move at a time. But we still don’t manage to realize them.
Consequently, I decided that we could actually set a variety of very short-term financial goals that provide immediate gratification. And just maybe, if we do that, our confidence and success will propel us into setting a few of those larger goals that we’ve been talking about for years.
I’ve come up with a list of five simple steps to investing success that I think will help us push our financial goals to the next level. They are easy, fast, and I believe will make a significant impact on our investing health. Let’s try them—after all, what have we got to lose?
Step #1 to Investing Success: Rethink the source of your investing tips and advice.
About 10 or 12 years ago, a company I consulted with did a mega-survey of investing newsletters. The report concluded that there were about 1,400 letters being published. I haven’t been able to determine what that number is today, but with the advent of the internet, which made web-based publishing incredibly easy—and inexpensive—I would bet there are hundreds more. Many don’t charge for their services; they survive by ad revenues alone. They don’t follow-up their recommendations, are often paid to hype certain stocks and have no accountability.
Over the 36 years that Mark Hulbert published his ranking digest of newsletters, he followed fewer than 200 letters. At Wall Street’s Best, I follow a few more than 200 letters. Both Mark and I have been in the investing business for a number of years, and as with Mark’s vetting process, our contributors also have to meet stringent criteria to be included in our newsletters. We welcome all applicants, but are, admittedly, choosy.
And that’s what I would recommend to you when selecting the sources of your financial advice. Believe me, there’s an investing newsletter for any style, sector or interest you may have, including Mutual funds, ETFs, Growth, Value, Energy, Commodities, Metals, Market Timing, and even Astrological Cycles. But more doesn’t mean better and free is not always credible.
To help you sort out the good from the bad, here are a few tips:
• Put on your skeptical visor. Many claims are not only misleading, but lies. If it sounds too good to be true, i.e., “Get rich overnight,” “Make 100% per month,” “No-risk investment,” it is too good to be true. Run as fast as you can.
• Who do they hang with? Is the writer well-known to other pros in the industry? Are they invited to speak at the premier investing shows, like The MoneyShow? Are they a contributor to our newsletters?
• Do they follow-up and are accountable for their returns? Many newsletters and websites I have seen love to throw out recommendations but rarely follow-up. That’s not helpful. And those that own up to their mistakes are gems. Not many do, but listen, no one’s perfect, and no one has a 100% batting average.
Step #2 to Investing Success: Learn what type of investor you are.
Sure, it’s easy to just blindly accept someone else’s recommendations; then you can blame them when all goes wrong! But, seriously, not every investment is tailor-made for every investor. That’s why it’s essential that you determine if it’s right for you. And to do that, you need to take a few minutes to evaluate your investing style and goals. I’ve made that easy. Just spend a few minutes with my Investor Profile Survey and you’ll come away with a very good picture of the amount of risk you are willing to assume, which will help you focus on the types of investments that will allow you to build your portfolio without losing sleep.
Step #3 to Investing Success: Plan on doing a bit of your own homework.
Knowing your investing style and risk awareness will help you decide which stocks deserve your initial focus. And there are some great investment research sites to help you quickly evaluate those stocks against others in their peer groups so you can narrow your investing choices.
For data on stocks: With recent changes, it’s not as robust as it used to be, but finance.yahoo.com, is still an excellent source for analyst rankings and statistical data.
For data on mutual funds and ETFs: Its star-ranking system is good, and www.morningstar.com issues a variety of distribution and portfolio composition information.
For stock screening: finviz.com is a great—and free—stock screener, although the site does have a more robust version that comes with a minimal price.
For easy peer group comparisons: www.reuters.com provides comps for a couple of dozen financial ratios under its Financial tab, once you enter your stock symbol.
For simple stock rankings: www.zacks.com is a good source for several hundred stocks.
Step #4 to Investing Success: Set stop-losses to limit your losses.
Not all stocks are winners, and if you don’t spend every minute of your waking hours watching a Bloomberg terminal, stop-losses can be your friend. The percentage of the stop-loss will depend on how much risk you are comfortable with, but for many investors, 10% is a good place to start. Mind you, if your stock is more speculative, you may want to widen your loss so you don’t get stopped out by normal volatility. And if the market is very bullish—like right now—a trailing stop may be better than an absolute one. That way, you lock in your profits as the stock rises. For more on stop losses, click here.
Step #5 to Investing Success: Set a price target the day you buy your shares.
Contrary to what most investors think, this is not hard to do. You can follow my step-by-step guide, or you can make a guesstimate by looking at the stock’s recent historical cycles, determine if those match up to the minimum gain you desire, set the percentage (30% minimum is my favorite; but if your stock is a true growth equity, you may increase that percentage), and sit back and wait until your stock reaches the goal. Here’s a tip: when my stocks near my targets, I reevaluate them to see if I can squeeze out more profits. If so, I almost always cash out at least 50% of my holdings (locking in gains), and let the remainder ride until my next target.
If you follow these five easy steps to investing success, you will greatly improve your investing prowess and returns. And just maybe, your investing success will spur you to achieve some of those other resolutions you’ve been putting off for years. Happy New Year!