Investor Toolkit: Look beyond share prices for higher portfolio investing profits

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on the fundamentals of successful portfolio investing. Each Investor Toolkit update gives you a fundamental portfolio investing tip and shows you how you can put it into practice right away.

Today’s tip: “Base investments on value, not stock price flip-flops”

Stocks go up and down every day. Sometimes there is an obvious cause in good or bad news. But there’s a large random element to stock price changes, particularly over short periods.

Common portfolio investing errors:

1. Becoming more “bullish” or optimistic because stock prices have gone up. Some investors only feel safe buying stocks after prices have risen. This is opposite to the way you make most purchases (cars, clothing, etc.) Ordinarily, it’s better to buy when prices go down, not up.
2. Becoming more “bearish” or pessimistic because stock prices have gone down. When other investors sell and drive prices down, you may wonder if they know something you don’t. However, random influences may be at work.

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To overcome these errors:

• Learn all you can about your investments. Frequently visit the web sites of the companies you invest in. Get on their mailing lists, and read their quarterly and annual reports. Ask your broker for research reports. Read the business news every day.
• Beware of advisor failings. Some advisors are “permabears” — perpetual pessimists. Others are blind to risk, so they recommend portfolio investing in speculative stocks at outrageously high levels.
• Take a broad view. Consider earnings, dividends and other factors in making portfolio investing decisions. They matter far more than short-term stock-price trends.
• Invest consistently. Don’t follow a portfolio investing strategy of trying to buy at the bottom or sell at the top. (As Bernard Baruch said, “This can’t be done, except by liars.”) Pick out a selection of well-established companies, and invest gradually over a period of years. Plan to hold indefinitely. You can always change your mind and sell if fundamentals deteriorate or your needs change.
• Practice “dollar cost averaging.” Invest the same dollar amount on a regular basis. That way you’ll buy more shares when prices are low, and fewer when they’re high. We analyzed the profit-generating potential of dollar-cost averaging in a recent Investor Toolkit update. Click here to read that article.

Next Wednesday, October 13, 2010, Investor Toolkit will give you a simple strategy for diversifying your mutual-fund holdings.

You can get our investing advice, plus buy/sell/hold advice on stock market picks you may be considering buying in our Successful Investor newsletter. Click here to learn how you can get one month free when you subscribe today.