The following is a part of Yakezie’s blog swap from Dannielle. She blogs about personal finance and Barbados at Odd Cents. You can check out my post on her site this morning as well about the best investment advice I ever received – Start Early!
For someone that’s now getting acquainted with the investment world, I’ve been trying to get as much advice as I can. In the last six months, I’ve attended seminars, done research online and asked friends for specific investment advice. As a result of my persistence, I’ve received several helpful tips which I’m very excited to share.
Take Advantage Of A Disaster To Invest
The most recent bit of advice came from a post entitled Taking Advantage of Disaster to Invest on Bucksome Boomer. The post advised to buy stocks in companies which are going through a disaster. Kay Lynn, the author, recently bought stocks in Carnival Corp which owns the Costa Concordia ship ( the cruise ship in the horrific Italy accident). The accident caused share prices to drop significantly and opened up opportunities to buy shares at a “reduced” price. In a short space of time after her purchase, the stock prices were on their way back up.
Stay Calm When The Markets Take A Plunge
In a pension seminar at work a month or so ago, we were having an informative conversation on investing. Our presenter, who is a pension fund analyst, advised that when we are investing and the stocks take a dive, advised us to stay calm and refrain from making hasty, emotional decisions. His logic was that things will eventually improve and might be as good as or even
better than when they first started to deteriorate.
Have A Contingency Plan
Late last year Valerie Coleman Morris did a seminar in Barbados. One of her quotes which stuck with me was “Panic is not the answer, having a plan is.” Staying calm during a financial crisis, when it appears that all of your money is going down the drain was also advocated, but she pushed the idea of having a plan when you’re faced with the decision. A contingency plan, or what many also call a Plan B, is one way to manage your risk and stay on top of what was going on.
Zero Risk Does Not Exist
I had a conversation with some colleagues and the Madoff and Stanford situations came up. One friend calmly announced that there was no such thing as zero risk investments. I researched this myself and it seems as though there is some discussion about the concept. As a newbie, I am going to be somewhat cautious and bear in mind that there is always the risk of failure. This would encourage me to put a contingency plan in place and stay calm if anything goes wrong.
These tips offer solid advice which keep me grounded. There are many different types of investments which all have the common goal of “growing your money.” My rule of thumb which goes for almost everything is to understand how my investments work. That way I can create the right contingency plans and decide when is the best time to increase my investments.
This is great advice, very practical to stock investing. My best advice was to do a long term value investing.
I’m a big fan of this advice as well – but stick to long term value plays. Make sure that the price drop is because of a fluke even, rather than a structural problem with the company!
Three quarters of this advice is good, but the buying individual company dips is not at all good idea. Dips in an individual stock could easily be just a preview of company’s impending bankruptcy. Just look at how financial stocks behaved in 2008. Companies go bankrupt or get bought at near-bankruptcy price all the time. The reason the stock market goes up over time is not because all or even most companies grow over time but because few grow a TON while most fizzle out. Picking individual stocks like you did is a good way to wind up a bunch of losers without any winners. While it seems “obvious” in retrospect no average or even above-average individual investor can possibly know how deep the company’s troubles run when a dip occurs versus what the market is pricing it at.
The “rebound” we saw in Carnival is nothing than a reflection of the wider market rally. Carnival went from 29.60 (at close of Jan 17) to 31.91 (yesterday’s close). At the same time S&P 500 of which Carnival is a component went from 129.34 to 139.65. So it was 7.8% growth for Carnival stock versus 7.9% growth in the larger stock market index at the same time.
Unless you are a Warren Buffett — and you or I or anyone else are not — you are only hurting yourself by buying individual stocks no matter how clever you think you are being your analysis. There’s no escaping the fact that on average it’s a losing game. Unless you put significant value on the gambling element of picking stocks, you will be much better off over your lifetime by investing into widely diversified low-cost index funds like VFINX, VTSMX, or VGTSX.
All great points!! I invested in airline stocks after 9/11 and banking stocks after 2008. It takes a lot of patience to ride out the volatility, but as long as you stay focused on the long term, you will make money.