Stock Market - The Five Myths_2
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MYTH 2: YOU MUST ASSUME HIGH RISKS TO MAKE GOOD MONEY IN THE STOCK MARKET.
A woman recently said to me, "I'm just scared to death of stocks. I can't afford to lose my hard-earned money." The perception of high risk in stock investing is not totally without merit. Many investors have lost substantial sums of money in the market. Visions of investors jumping out of window back in 1929 are graphic reminders of the risk inherent in stock investing.
Recent events on the market, the Great Crash of '87, the Friday the 13th Mini-meltdown, the ills of Program Trading, insider trading, leveraged buy-outs, etc., have also contributed to the casino image associated with stock investing. To a large degree, the investment community is their own worst enemy in scaring off the individual investor.
That is very unfortunate because stock investing is one of the best avenues the average person has of has of accumulating substantial wealth. And it really doesn't have to be very risky.
Here's how to make good money in stocks with low risk:
1. Buy stocks with consistent, predictable earnings growth. Buy stocks with earnings growth rates of at least equal to the sum of current inflation and interest rates.
2. Diversify.
- Do not put more than 10% of your money into any single stock.
- Do not own more than 2 stocks in the same industry.
3. Do not plunge into the market. Spread your investments over time.
4. Use Stop-Sell orders to limit risk.
Stocks with consistent, predictable earnings growth are the safest stocks you can buy. They represent the best managed companies in America.
A stock portfolio with an average earnings growth rate of at least 14%/yr. has a high probability of doubling in five years. In twenty years, it will have increased by 1,500 percent.
If you bought 10 stocks, and limited your loss on any single stock to 10% by using Stop-Sell orders, your total portfolio risk is only 10%. Your risk on any single stock is only 1% of your total portfolio. How many investments can you think of that have the upside potential of stocks with such limited risk exposure?
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