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How to Make the Stock Market Work for You
by Carmelo J. Montalbano
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Overview
The stock market works for you the longer and more you participate. The regular market highs and lows that present opportunities to compound liquid assets at a rate not found in bonds or money market instruments on a long-term basis. Investors should take more risk early in life and gradually reduce that risk as they approach retirement. Stock ownership should not drop below 40 percent of a portfolio, so that investment principal keeps up with inflation.
Go Long Strength and Avoid Weakness
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Step 1
Save and invest regularly, beginning early in life. Let time work for you by allowing the gradual accumulation of stock over a variety of bull and bear cycles. Use dollar cost averaging (fixed amounts invested on a regular schedule) and watch your assets grow as the domestic and world economy grows.
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Step 2
Reinvest all dividends. Over a 20-year period on the Dow Jones Industrial Average, nearly half of the stock market return comes from dividends. Reinvesting dividends while principal grows with the rate of economic growth yields maximum total return.
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Step 3
Diversify your assets. Accept a lower return in part of your portfolio by buying bonds. In lean times the bond income can be reinvested in stocks to gain the additional advantage of bear markets. Stock holdings should be invested in at least 20 stocks or better yet a combination of mutual funds. Mutual fund holdings should include growth, value and income funds.
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Step 4
Buy domestic, emerging market and technology stocks. These are the markets that provide the greatest growth potential over the long term. Study returns of different funds and invest with proven track records. Keep investment management costs low by using exchange-traded funds in lieu of more expensive mutual funds. Over 20 years, a two percent difference in fees results in a 50 percent lower return.
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Step 5
Compound your assets to take advantage of stock market swings. An average return of nine percent or six percent above the rate of inflation is average for stocks. Contributing to pension funds and IRA accounts, while tedious, is the best possible plan to follow to capture the broad increase in asset values throughout the world.
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- Pocket calculator
Spreadsheet to keep cost and accounting data for taxes
- Pocket calculator
- Spreadsheet to keep cost and accounting data for taxes
- Make every attempt to minimize management fees and costs.
Reinvest dividends.
- Make every attempt to minimize management fees and costs.
- Reinvest dividends.
- Manage your assets among several different institutions and brokerage accounts to eliminate fraud or mismanagement possibilities.
- Manage your assets among several different institutions and brokerage accounts to eliminate fraud or mismanagement possibilities.
