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Following basic investment guidelines can pay off
The Dow Jones Industrial Average has turned in five straight years
of double-digit returns, and many of the broader market indices have been
setting records, as well. So, investment success is there for the taking, right?
Actually, it's not quite that simple.
All the attention paid to the skyrocketing Dow tends to obscure the fact
that a great many stocks have actually declined over the past few years. And
these aren't just wildly speculative companies. In 1999, for example, the list of
companies whose stocks were down included names such as Coca-Cola,
Gillette, Xerox and Pfizer.
The fact is that nobody _ not even so-called "market experts" _ can
consistently and accurately predict the stock market's winners and losers. That's
why the really smart investors have thrown away their crystal balls. Instead,
they've succeeded by following these basic investment guidelines:
Base your portfolio on a clear set of investment
objectives _ It's hard to achieve investment success by
simply throwing together a collection of stocks, bonds and mutual funds. Before
you build your portfolio, ask yourself these questions: What are your
long-term goals? What's your tolerance for risk? How long do you plan on
investing? Once you have the answers, you'll be able to create a portfolio designed
to meet your individual needs.
Diversify _ Diversification may
be the oldest _ and wisest _ rule of investing. The more diversified you are,
the more you will cushion yourself against losses affecting just one type of
investment. Plus, by having your investment dollars in many different
categories, you'll be able to take advantage of
multiple growth opportunities.
Avoid big risks _ As a general
rule, the greater the risk incurred by a specific investment, the greater the
potential reward. The trick is to find those investments whose risk level is
appropriate for you. In evaluating risk, take a long-term perspective. Historically,
high quality securities have rebounded after severe market losses, while
low-quality securities sometimes never do.
Also decide how much risk you are willing to accept. It's not at all
unusual for the stock market to drop 10 percent in any given year. If your $1,000
investment temporarily drops to $900, you won't like it _ but you can probably
overcome it. However, it you lose half your money on a risky investment, then
that investment will have to double in price for you to break even. That could
happen, but it's a lot to hope for.
Don't "over-adjust" your
portfolio _ It's a good idea to periodically
re-evaluate your investment portfolio to make sure it's still aligned with
your needs and goals, both of which can change over time. But you'll need
to avoid the temptation to over-adjust your portfolio. Constantly buying and
selling securities may eventually result in significant taxes and fees, which
means you'll have less to invest and your money will grow more slowly.
Of course, there are other general investment guidelines out there. But
if you can follow the basic ones listed here, you're well on your way toward
becoming a successful investor.
CHRIS BRUNTZ is an investment representative for Edward Jones
financial services. His office is located at 111 1/2 E. North Bend Way, North Bend.
He can be reached at (425) 831-5757.