Filed under: Business, Economics, economy, Finance, Investing, middle class, Money, stocks, Trading | Tags: Business, Buy and Hold, Dividend, Economics, ETFs, Finance, Growth stocks, Investing, Money, stocks, Taxes, Trading, Value stocks
Many investors and Wall St. professionals argue whether the traditional ‘buy and hold’ philosophy to investing still works in today’s society and economic times. This argument still holds merit with dividend paying stocks over the long haul as it adds to the annual return. Typically these ‘value stocks’ have good balance sheets and have a good business model with consistent earnings, although they aren’t high flying growth stocks that can return high double digit returns. Another factor to consider is if the taxes go up for capital gains, both long-term (1 yr or longer) and short-term investing/trading (less than a year) or on the dividends paid out to investors. Tax law changes can significantly affect the annual returns for shareholders. With the recent drop in the markets in 08 and early 09, many bargain hunters started buying for the long haul as they scooped up shares on the cheap, hoping to not see these share prices that low for many years to come.
So the question is, how far out should you be looking to hold investment positions and when is the appropriate time to sell and be in cash? There are many factors that can affect stock returns such as: competition, the value of the dollar vs foreign currencies, the business/economic cycle, geo-political factors, commodity prices, the Federal Reserve raising interest rates to fight inflation, presidential/govt tax reform and initiatives, earnings season, employment data, consumer spending and confidence, manufacturing data, GDP-imports and exports, and yes even the weather…yes hurricanes, unseasonable weather, etc. There are other factors as well, but the above list covers the majority. Sometimes it’s best to be in cash when the markets rally significantly and you see returns that are in the double digits or if things are a little shaky on the economic front.
When looking at growth stocks, it’s a different ball game. You want to get in when the numbers are good and the company is growing at significant double digit rates, but you want to get out when signs are showing that the company is slowing and missing earnings targets. Growth stocks typically don’t pay a dividend as they reinvest their earnings into the company and the valuation and P/E (Price to Earnings) ratio of these companies are generally higher than dividend paying, value stocks. Growth companies typically lack competition, have a few hot, trendy products and have more pricing power which accelerates their earnings and boosts the stock price significantly. At some point, the accelerating growth of a company comes to an end, and the stock will experience massive sell-offs. Many companies at this point look to implement a dividend but the P/E drops and the stock becomes more of a value stock and doesn’t see the big price swings as it did before. This is a natural maturation of all companies and you don’t want to be caught long in a stock that transitions from a growth to a value stock as it could be quite painful to your portfolio.
In closing, you have to pay attention to your stocks that you’re invested in (do your homework). You could also consider ETFs if you don’t have the time to follow individual stocks or if you want a slightly less risky way to play the trend. You also want to stay diversified to protect your downside or as a trend goes against your recent gains. Always have a plan in mind and an exit strategy if things dramatically change on your original plan or philosophy and that means to be flexible. Lastly, as you have significant gains, you may want to trade around a core position. As the stock goes up, sell a little of your position and as it comes down, buy it back cheaper. If you got in to a loser, cut and run from it ASAP and stick with your winning trades.
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