With the start of a new year comes a new wave of excitement and action for the stock market.
This positive momentum is expected to continue, and I want you all to benefit from the push. More importantly, I want your investments to pay off — not just for the first few weeks of the year, but for all of 2014 and beyond.
That’s why I’m laying out a few simple, easy and effective steps you can take now toward making intelligent, profitable investment choices.
Take Advantage of the ‘January Effect’
The “January Effect” refers to the surge that lifts the market, historically during the first of the year. Typically, the January Effect begins at the end of the year, right around the holiday season, and continues into the first quarter. Investors often are cheered by the boost in consumer activity seen in retail and other sectors. Plus, many use this time to make trades that will close out the previous year’s portfolio on a high note and begin the next on a solid foundation.
You can take advantage of this period by loading up on strong positions now and preparing to ride the next profit wave. There still are great stocks at great prices on the markets right now. You just need to step in and scoop them up.
Build a Portfolio that Reflects Your Needs
When building your portfolio, the most important thing to keep in mind is what you want it to achieve. There are all types of investors out there. And whether stock investing is your career or you’re just trying to build up your retirement fund, it’s important to make your portfolio work to meet your specific needs.
The first step is sketching out those needs. Then it’s time to determine a comfortable amount of money to dedicate to starting and keeping your portfolio. And then comes the fun part — deciding how to allocate your investments. It’s important to decide early on how to focus your portfolio. Are you a conservative, moderate or aggressive investor?
Whichever way you decide to go, always keep in mind the primary function of your portfolio. It’s all too easy to get excited about a “promising,” yet risky, investment, put more money than you should into it, then come up broke when the opportunity busts. Only you can determine what type of investor you want to be and how your investments need to work for you. Whether you turn toward safety in big blue chips, the potential prospect of emerging markets or take a risk on fast-moving picks, keeping in mind your ultimate goals will be a big help in designing a portfolio that meets your needs and expectations.
Focus on Fundamentals
Regardless of what type of portfolio you build or investor you become, all investors need to remember to do one thing: focus on the fundamentals. Unless you choose to invest in companies that have a solid foundation and room left to grow, you won’t be making money in the long run.
Research the companies you’re considering putting money into. Are they well-established businesses? Does the stock have a history of performing well? What are analysts saying about the position? These are just a few things to consider when picking stocks. Focusing on the details that define a company and stock’s fundamental strength is an easy thing for investors to do, but many don’t take the time to do so. And the lack of due diligence is often detrimental to their investments.
If you’re looking for a way to test your portfolio’s fundamental strength, I suggest you start using Portfolio Grader today. It analyzes a stock’s fundamental strength and takes into consideration eight different metrics, including sales and earnings information — assigning “grades” telling what kind of buys or sells they are.
Diversify Your Holdings
One thing that I can’t stress enough to investors is the importance of keeping a diversified portfolio.
While you may want to maintain a portfolio that has an overall conservative, moderate or aggressive slant, it’s important that you include different types of stocks. You’ve probably heard the old saying, “Don’t put all your eggs in one basket.” This is perfect advice for investors.
When you’re looking at your portfolio, you don’t want to see all conservative stocks or only technology plays. It’s necessary to select holdings that have different degrees of aggressiveness and come from a variety of sectors. Remember, your portfolio isn’t just a group of individual stocks. You need to think of it as a family, and within the family all the members need to work together.
A diverse portfolio will help you do well in a variety of circumstances and balance out when certain areas are performing better than others. So when you’re making stock selections, try to think of the stocks you already own and pick new ones that will complement those you already have. Diversification is the key to well-rounded profits.
Stay in the Loop
Another step you need to take is keeping up with market news. You’re already off to a great start with this by coming to InvestorPlace.
Being aware of market conditions and company news is an important part of investing. The better informed you are about your stocks and the overall market, the better equipped you’ll be to maintain your portfolio. Understanding what’s going on and why can make all the difference in having a struggling or middling investment portfolio and one that is flourishing.
It doesn’t have to be an everyday task, but try establishing a routine to stay in the loop about what’s going on with your stocks. The little bit of extra work will pay off big.
Don’t Balk on Down Days
Finally, I’d like to remind you that no matter what we do as investors, the market often has a mind of its own. Every day is not going to be a good day. No one can win all the time. However, it’s important to take the bad days in stride, just as you do the good.
Many times, investors see their stocks drop a few percentages and go into defense mode. The same is true when the overall market falls. The natural tendency is to pull up stakes and hit the road. But hasty decisions often are an investor’s downfall. The stock market is a living, breathing entity, constantly changing. At any given second, a stock can be down, then shoot back up two seconds later.
Fluctuations in stocks and the stock market are to be expected. Considering all the external factors that affect market activity and the thousands of moving pieces that comprise it, it would be impossible for the market to only go up — and bad for business.
With that in mind, I want to caution you not to overreact on down days. Sometimes there is cause to be concerned, but you’ll be able to tell when a decline is substantial enough to worry about. More often than not, declines in a stock or the overall market are fleeting and won’t have a lasting negative effect on your holdings.
Remember: Keep your cool when it comes to investing.