Saturday, December 12, 2009

The 3 Secrets of Investing Success

Secret #1: Dividends Really Do Add Up

Investors have turned their backs on dividends and dividend-paying stocks since the dot-com boom when growth became fashionable. But even a small dividend, when reinvested and held for years, can turn into big money.

Dividends matter to overall returns. In fact, they accounted for a third of the return of the S&P 500 Index since 1926. That's not chump change over the long haul. It’s certainly not chump change during bear markets to help weather the storm.

Secret #2: Diversify, Diversify, Diversify

You could say it was just luck that my great-grandfather was an Exxon investor instead of General Motors, or other companies that have not survived. If he had gifted GM shares to my grandmother and she held on for 37 years, she would be left with virtually nothing now.

But she planned for that scenario.

Over the years, my grandmother sold some of her Exxon shares in order to diversify her portfolio. Her plan was to have no more than 5% invested in any one stock. She has stuck with that faithfully over the years and has rebalanced when necessary.

When the downturn in the markets struck in 2008 and 2009, her portfolio declined along with everyone else's. But good planning kept her losses to a minimum.

Secret #3: Don't Panic

Sometimes the best thing to do…is nothing at all.

That's what Rosalia did when the markets were coming unhinged in October/November 2008 and again in March 2009. Buy and hold means what it says. You buy and, well, you hold.

That doesn't mean she wasn't nervous. Oh no. There was plenty of handwringing going on. But panic didn't overtake her investment decision process.

At the same time, that also doesn't mean you should hold on at all costs. You must know the companies you own, including their strengths and their weaknesses in their market segments. Knowing each company's intrinsic value helps you to ride out the wild market gyrations.

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