The last few weeks started as a few percent decline in the market. As gurus and commentators covered it, they viewed the decline as a temporary, week-long or even a few day-long event. However a few weeks later here we are, still waiting and wondering when the market will rebound.
As a long-term investor this is exciting for me. Not only have stock declined roughly –% from their high, they continue to fall to increasingly discounted prices. Everything might not be a bargain at this point, but after falling about 9% the market is a lot closer to reasonable pricing than it was a month or two ago.
So when prices drop like this, what should an investor do? They should do what the best investors do – find good companies and buy them at favorable prices. This might mean waiting and watching for a good company to drop below your perceived value it.
But for index and active mutual fund investors slowing dollar-cost-averaging into the market may make the most sense. Understand that the market will come back. It’s just a matter of how quickly it does.
There are some investment advisors who scare away from the idea of sector investing. However, with adequate research, one might find that certain areas of the overall market tend to outperform others in various economic seasons. But is the risk of overexposing ones’ self to sectors worth it?
Before I answer this question I’d like to list the 11 major stock sectors:
2. Real Estate
3. Consumer Discretionary
4. Consumer Staples
Before someone considers investing in specific sectors, they must recognize that over time there are periods and seasons in which one sector performs better than others. Some of the worst sectors to own in bear markets is Technology stocks like Google, FaceBook, Apple, Amazon and Microsoft. However as times get better, this sector usually outperforms the rest of the market.
My recommendation is to not invest in specific sectors and sector funds unless you are comfortable risking a significant portion of your portfolio. If you do decide to invest in sectors, pick one that is both posed to do well over the next few months as well as the next decade. You want both the fundamental and technical analysis working in your favor. Overall, stock sectors can be a very lucrative strategy for investing.
I am going to briefly cover the top most widely used “investment” strategies for stocks. Technically not all of these methods are investing because a few of them involve short term trading.
1. Stock Index Mutual Funds
There are many types of indexes. Indexes are essentially a predetermined basket of stocks that are formulated using a set of rules. For example the most widely used index, the S&P 500, is an index that incorporates the 500 largest companies in the US and weighs them in the index accordingly. There are other indexes such as small-cap indexes or tech stock indexes. The bottom line is that with an index you are purchasing a tiny portion of a large basket of US stocks that is going to reflect your sector of choice.
2. Actively Managed Mutual Funds
Actively managed indexed funds are very similar to indexes except for 1 key difference: They aren’t bound by a predetermined set of guidelines. For example an active mutual fund might have a focus on large-cap stocks or international stocks, yet there aren’t any rules on how much of each of these have to be purchased. This is different from an index where the predetermined weight of each stock is set in stone. Out of this difference comes an increase in management fees because of the funds active, and therefore more costly management structure.
3. Value Investing
This is the method used by the smartest and most successful investors (in my opinion). Warren Buffet is the most famous example of this. Value investing involves determining a company’s value (regardless of current perceived value) by looking at a balance sheet and income statements using fundamental analysis. As the investor sees a price drop well below it’s determined real value the value investor can seize up good deals and hold on for the long-term.
4. Day Trading
This is a common strategy by short-term investors who use primarily technical analysis (looking at charts and trends) to make “investing” decisions about which stocks to buy and then sell quickly for a profit. The risky thing about this is that if you accidentally buy a stock or ETF that suddenly drops in price, you could get stuck with a plummeting investment that was truly overvalued.
5. Random Strategy
This strategy is specifically for people who don’t know what they’re doing and don’t even pretend to try to act like it. They randomly purchase stocks that “sound cool” and then hope that they rise in price. By far this is the stupidest strategy just behind day trading. You can lose your shirt much easier with mindless/random investing or day trading than you can with the other strategies I outlined above.
Whatever you do, please don’t choose route 5, and preferably strategy 4 as well. Not only is day trading risky and the fees expensive, it has also be statistically been proven to outperform traditional investing methods over the long-term.
With the rise of social media marketing, the technological advancements with commerce, and the general business sentiment in the U.S. rising, many young people(as well as older people) are finding entrepreneurship as an increasingly appealing life choice. I would say as with most trends, there is both bad and good aspects.
On one hand entrepreneurship is what America is built on. From Ford Motor Co. to Apple Computers, companies that are able to provide what customers want will always succeed. However, there is a new mentality emerging that entrepreneurship is “fun” or that simply by starting a company you are instantly successful.
By very definition only 1% can become the 1%, which is why thousands of businesses fail each year. Starting a business can be exciting, rewarding, and profitable, but it probably won’t be “fun” in the conventional understanding of the word.
When starting a business ask yourself, “why am I starting this business?” This question helps you understand yourself. And then ask, “Is there need for my product or service?” This helps you understand the customer. And lastly ask, “What’s the best (most efficient, effective, and customer-centered) way of bringing my products and services to my market? This question will help you understand your action steps.
After asking those questions you’ll have an idea as to where your mind is at, where the customers’ minds are at, and where your next actions should be. While answering these questions thoroughly might not be easy, it will be highly beneficial to any rising entrepreneur.
Action steps: Ask yourself, “Why am I starting this business?”