Stocks that pay you back
After a topsy-turvy decade for stocks you might be finding it hard to stick to your investment plan. Perhaps youre tempted to take on more risk in an effort to make up for past losses. Maybe youre invested in only a few stocks, or those that appear to have supercharged growth prospects. Alternately, you might be cringing in fear after dumping your stocks. Problem is, taking an extreme stanceone way or the otheris likely to lead to disappointment in the long run.
Instead, a balanced approach is more likely to lead to a satisfactory outcome. When it comes to stocks, take a page out of Warren Buffetts book and try to invest in good stocks for the long term. Thats just the sort of approach that I recommend.
Let me show you how to construct a solid do-it-yourself stock portfolio. My goal is to start new investors out on the right path and provide a few useful pointers to more seasoned aficionados at the same time.
Before you begin
A few words of wisdom before we launch into the stock-picking advice. It makes little sense to build an investment portfolio if you dont have a solid fiscal foundation, so thrift and debt elimination should come first. You should pay off your credit cards, lines of credit, and other debts before starting to invest seriously.
After eliminating debt, sock away some cash in GICs or a high-interest savings account. If you lose your job, run into illness, or face some other calamity, you dont want this emergency fund to be in stocks. You should only turn to the markets with money that can be invested for many years.
Once youre ready to invest for the long term, how should you divvy up your portfolio? Should you put all of your long-term investments in stocks, or does it makes sense to hold bonds as well?
The yield generated by bonds these days is pitiful: at current inflation levels, bond investors are losing purchasing power. Taxes make the situation even worse. (Ideally bonds should be sheltered in RRSPs and TFSAs.) However, bonds are still a useful bulwark, because they offer some stability and, unlike stocks, theyre unlikely to plummet in value quickly. You probably wont make much money from bonds these days, but youre not likely to lose 50% either. Stocks cant make such promises.
In his book The Intelligent Investor, Benjamin Graham suggests starting with a half-and-half split between stocks and bonds in normal times. Should one or the other become attractively priced, then you might tilt the portfolio accordingly. But at a minimum, investors should have at least 25% in stocks and 25% in bonds.
You might also tilt your portfolio one way or the other based on personal preference. If youre aggressive, then you might want to go 75% stocks, while more conservative investors might lean to 75% bonds. Older investors with shorter time horizons might similarly opt for more bonds than the young. But these are rules of thumb and individual circumstances might call for different allocations.
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Stocks that pay you back