Hey All,
I’m new to investing. I see the strategy here is to invest in 25+ stocks over 5 years. Should I just follow this strategy based off the stocks Fool recommends or is there more to it? Like is learning more about investing necessary, or will this strategy just work?
Thank you!
Ben
Hi, Ben.
Learning is definitely part of the Motley Fool goal for investors. A couple things. The advice to invest in 15-25 companies (Fools invest in companies, not stocks) is a starting point to achieve a minimum level of diversification in your portfolio. Holding those positions for 3-5 years (or longer) is to embrace a long-term buy-and-hold investment Foolosophy. This strategy helps Fools not get distracted by short-term market mood swings and economic impacts, such as inflationary pressure, pandemic related issues and the war against Ukraine by Russia that do not change the fundamental investment thesis for the company.
This is a Freemium Community discussion board but I am guessing you are a new Premium Fool, possibly a Stock Advisor member. If so, you will probably want to post on your Service Community discussion boards to get more responses. But in the meantime, I am going to lay a ton of investment advice on you.
The first thing I’d do is establish an Emergency Fund, valued at 3-6 months living expenses, depending on how secure you feel in your job. The eFund is to replace income should you suddenly and unexpectedly find yourself in between career options. You cannot count on severance and unemployment insurance benefits - you need to provide for your own protection to give you the flexibility to find the right next job.
After that, I would open a Roth IRA for both you and your spouse (if you have one) as the place to put up to $6000 each, based on your earned income, hopefully each year. The contributions are not tax deductible, but if you are early in your earnings career, then you are likely in a lower tax bracket than you will be in the future. You’ll be grateful decades down the road when you can draw on these savings tax free and in the meantime, if you find yourself needing emergency cash, you can withdraw the amount of your original contributions (but not earnings) without penalty.
The biggest friend you have as an investor is time - the longer you have to invest, the more your investments can grow. In the short term, an investment is subject to market swings. Long term investments have the freedom to ride out downturns and rise above the market.
So the younger you are, the more time you have, the more aggressive you can afford to be. In your middle years, you have more financial responsibilities, and you should moderate your portfolio to a balance of aggressive and conservative investments. As you near retirement, your time range narrows and a mostly conservative approach is more important, focused. And once you are in retirement, capital preservation of retirement income is crucial.
If you haven’t already, I recommend reading the 13 Steps To Investing Foolishly over at Fool School:
https://www.fool.com/how-to-invest/thirteen-steps/index.aspx…
There’s also a 13 Steps to Retiring Foolishly here:
https://www.fool.com/retirement/index.aspx
As to what to invest in, I might consider an ETF rather than a mutual fund, and if you haven’t looked at Vanguard or some other low-cost discount brokerage, you should. You can find a page comparing a number of Discount Brokers here:
https://www.fool.com/the-ascent/buying-stocks/
There’s also a page on how to size up a broker here:
https://www.fool.com/investing/brokerage/10-ways-to-size-up-…
And there’s a discussion board where you can talk with other Fools about the brokers in which you are interested:
https://discussion.fool.com/discount-brokers-100146.aspx
So how do you figure out what the right allocation is? Here are a couple of articles:
https://www.fool.com/how-to-invest/what-should-i-invest-in.a…
https://www.fool.com/how-to-invest/a-quick-guide-to-asset-al…
https://www.investopedia.com/articles/pf/05/061505.asp
Here’s are Fool School pages on Mutual Funds and ETFs:
https://www.fool.com/investing/etf/index.aspx
https://www.fool.com/mutualfunds/mutualfunds.htm
There is also a discussion board specifically for Investing Beginners to learn from more experienced Fools:
https://discussion.fool.com/investing-beginners-112963.aspx
If you have already joined either the Stock Advisor, Rule Breakers or Everlasting Stocks premium service, I would encourage you to look at the Best Buy Now opportunities that are also Starter Stock companies, followed by the remaining Best Buy Now opportunities, and then the remaining Starter Stock companies. This will help you build a solid portfolio.
One approach is to build a watch list divided into four categories. First, there are the Must Haves, companies in which you have deep conviction and absolutely want in your portfolio. Second, there are the Strong Haves, companies in which you have strong conviction but wouldn’t just totally die if, like, they weren’t in your portfolio. The last category is the Nice Haves, companies in which you have positive conviction but aren’t especially excited over. The last category is Never Haves, those companies you just flat out think are wrong for you.
This way, when the market presents discount opportunities, you are ready with a shopping list.
One unofficial rule many Fools follow is buying in thirds. Let’s say you want to purchase about $2500 of a company. You could buy $1000 now, then another $750 on a future dip in price, again the final $750 down the road when the price is again at a discount. That could be next month, next quarter or even next year. Or even tomorrow, given the current market volatility.
This is a form of dollar cost averaging which can even out your cost basis. Not relevant if your investing through a tax-advantaged account, but important if you are watching your potential capital gains and losses. It also lets you spread the cost of a position over time, which can be helpful if you are adding cash to your portfolio periodically rather than all in one lump sum.
As to the question of how many positions to maintain in your portfolio, again, there’s no hard and fast rule. The goal is to maintain diversity so that your portfolio does not carry too much risk from a single investment. The Gardner Brothers have suggested 15 companies is a good, or at least aspirational, starting point. How many total positions and how much you invest in that initial position is just a question of with what you feel comfortable.
Tom Gardner has encouraged Fools to own 10-20+ stocks, hold them all for 5+ years and expect 40% of them will lose to the market. Just 10-25% of remaining positions will drive 90-100% of the returns. That last point is why it’s essential to diversify, because there is no way of knowing in advance which companies will do what.
One trap many Fools fall into is thinking too much about how many shares they own and not enough about the value of those shares. They think they are somehow doing better buying a lot of shares of cheaply priced stocks rather than just a few shares of more expensive companies.
But the market price of a share of stock is completely dependent on the total market value of the company divided by the number of outstanding shares. The higher the market value, the higher the stock price. The more outstanding shares, the lower the stock price. However, neither market value nor the size of the shareholder pool is a measure of performance.
Remember that math you hated in school? Here’s where it comes into play. Regardless of whether you own 1000 shares at $1 per share, 100 shares at $10 per share, 10 shares at $100 per share or 1 share at $1000 per share, you still own $1000 of that company, and if the share price goes up 10%, you’ve gained $100 any way you split it. So as you can see, the number of shares plays no role in your gain.
If there’s a company in which you would really like to invest but is too expensive for your available cash, just wait until you can save enough for a share.
Many Fools watch their portfolios daily, hanging on each climb or drop in stock price and wondering what each piece of news means to the market. I like to say invest in companies, not markets. So instead of dwelling on quarterly earnings numbers, focus on how and what management says is happening with the business. When there’s a big drop in the stock price, ask yourself whether there was any significant change in the company’s operations that triggered or resulted from the market’s actions. If not, it may be a buying opportunity.
Foolish philosophy emphasizes long term investing of companies rather than short term trading of stocks. Focus on the company’s performance, not the market’s performance.
Another trap Fools try to avoid is investing emotionally in reaction to significant news or large price swings. Fools try to never make investing decisions out of fear or panic, or unfounded optimism and irrational hope. It’s not that Fools embrace risk but that we try to manage it through research and rational decision making. It is said that fools rush in, but Fools invest with purpose.
The motto of The Motley Fool is to Educate, Amuse and Enrich. You’ll notice that enriching comes last and education comes first. And bridging the gap is amusement. So take advantage of the resources TMF has to offer to learn about investing as you build wealth for the future, and have fun during the process.
Fuskie
Who is throwing a lot of information at you but hopes you will take the time to do the homework, develop your own individual investment strategy and then execute and share your experiences with your fellow Fools here on the TMF Community…
Premium Home Fool: Ask me a Foolish Question, I’ll give you a Foolish Response!
Ticker Guide: The Walt Disney Company (DIS), Intuit (INTU), Live Nation (LYV), CME Group (CME), MongoDB (MDB), Trip Advisor (TRIP), Vivendi SA (VIVHY), JFrog (FROG), Virgin Galactic (SPCE), Axon Technologies (AXON), Blackbaud (BLKB)
Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice
Disassociation: The views and statements of this post are Fuskie’s and are not intended to represent those of The Motley Fool or any other sane body
Disclosure: May own shares of some, many or all of the companies mentioned in this post: https://tinyurl.com/FuskieDisclosure
Fool Code of Conduct: https://www.fool.com/legal/the-motley-fools-rules.aspx#Condu…
Invitation: You are invited to interactively watch Motley Fool Live online television: https://www.fool.com/premium/live/
Call to Action: If you like this or any other post, Rec it. Better yet, reply to it. Even better, start your own thread. This is YOUR TMF Community!