Gardner: Q&A regarding stock investments (column)
Austin writes: I am trying to invest for our family’s future and have been reading your column. There are so many more questions I have about buying stock. First, does it make sense to buy stock in one or two companies with which I have some knowledge, but have the bulk of my portfolio in mutual funds? When should I make purchases of stocks — is there a certain time of the year that is best? I appreciate your help and your column.
Austin, these are great questions. Successfully investing in stocks requires a certain amount of knowledge that is hard to succinctly convey in 700 words, so I tried to cover the most important aspects in my last column. Regarding your first question, it certainly makes sense to buy some stock in a company that is in an industry you understand or perhaps the one in which you work. Your experience or personal knowledge will allow you to assess whether the products the company sells are particularly beneficial or even critical to the industry it supports. Another possibility is there is a new start-up that you think has a lot of potential, and you want to buy some stock before the price gets too high. Then, of course, there is the purchase of your own employer’s company stock, if it is a publicly traded company. Lastly, you may want to buy some shares of a large, blue chip stock when it is down and then hold it or possibly add to it over time. The stock you purchase would supplement your portfolio, not replace your diversified portfolio.
It is very hard to know when the perfect time is to invest. There are two times when you should not invest: 1) When you feel strongly that the stock market is about to have a correction or has already started to fall and it appears it will keep going down. Wait until it stabilizes and buy stock at a lower price, and 2) if the value of the company stock you are considering starts going down because of bad news, a cyclical market or from just being overpriced, wait for the price to settle before making a purchase. Or, if the news is really bad, you might want to consider another stock instead. Keep in mind that a stock is usually considered worth more and priced higher just before the ownership cutoff to pay dividends and priced a little lower after dividends are paid. Once you buy a stock, it makes sense to set it up on a dividend reinvestment plan and allow the dividends to buy more stock for you over time. By investing in this manner you are not trying to time the market and it is automatic, usually without paying a brokerage fee. The stock market has hit record highs repeatedly this year. If the Trump administration is able to push through a corporate tax cut, the market should continue to go up. Regardless of what happens, remember that you are investing for the long term and that markets are cyclical and will go up and down. Set your course and stay with it.
The question you did not ask is when to sell and it is the hardest decision investors make. Usually I buy a stock and hold it after doing my research. Occasionally I will buy a stock I think is undervalued and hold for its price appreciation and then sell. Unless there is a tremendous price appreciation that I think will be lost by waiting, I will hold a stock at least a year and a day so that capital gains will be long term and not short term. Paying short term capital gains taxes can really cut into your returns. If you decide to invest in a couple of stocks, buying and holding them is usually the best way unless one of them turns out to be a troubled company. As a shareholder, continue to follow the news about the companies and their performance at least quarterly. If sales are off for a year or more or they are considering closing stores, sell before the price goes to nothing or they file for bankruptcy. There is no reason to ride it all the way down and take more losses.
Nancy Gardner is a Certified Financial Planner. Nancy and her husband Bill split their time between Summit County and Montgomery County, Texas. Send questions to firstname.lastname@example.org.
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