At Henssler Financial, we generally recommend that if you have less than $50,000 to invest in the market, mutual funds should be purchased to take advantage of the instant diversification. You may also consider exchange-traded funds (ETFs), which are diversified like a mutual fund, but trade like a stock. ETFs have been around for about 10 years, but have grown in popularity in the last three or four years. Investors should be able to find an ETF that tracks a major index like the S&P 500.
Even if you are a diligent saver, investing $500 a month, how much stock can you really buy? By purchasing shares of a mutual fund or ETF, you have instant diversification in several stocks across different sectors. No one stock should be more than 10% of your total portfolio.
When your portfolio is more than $25,000 to $50,000, you may consider shares of individual common stocks, in different industries. To be properly diversified in individual common stocks, you should own 10 to 16 different stocks in at least six to eight sectors of the market.
When considering individual stocks, you should know what the company does, and what their competitive advantage is. You should look at the company’s financials, and consider how strong their balance sheet is. You also want to know the company’s outlook on the future.
Yahoo! Finance is one of the best free resources for stock information. It covers the fundamentals and highlights industry reports. Google Finance provides good company descriptions and interactive charts. Google also has a robust stock screener that allows you to search for criteria like market capitalization, P/E ratio, dividend yield, and other valuation metrics.
If you are a serious investor who is dedicated to researching individual stocks, you may want to consider a subscription service like Value Line. The company has been around for almost 70 years, and provides a good explanation of its ratings methodology. With Value Line reports, you can look back at a company’s earnings and profits. These are the fundamentals that matter when considering potential investments.
Stock valuations vary from the price one might pay for a business. If you wanted to buy a dry cleaning business, you would insist that the price match the value of the asset. If the business were losing $100,000 per year you would be unlikely to pay $100,000 for the right of ownership. However, the stock market is forward-looking. This makes investors willing to pay prices that are often disconnected from past earnings performance on the notion that future earnings will grow and the investment will ultimately flourish. Unfortunately, historical evidence of the dot-com era and many recent popular technology IPOs show there is a significant risk to investing in companies that have never experienced positive earnings.
The S&P 500 has achieved several new all-time highs in 2013. Over that same time period, corporate earnings rose from $69 to $112. It took some time for the financial markets to recognize the climb in earnings and that is not uncommon. This is why we watch the fundamentals of companies such as earnings growth and profitability, and try to purchase stocks when the market has overlooked their positive developments.
At Henssler Financial we believe you should Live Ready, which includes understanding the fundamentals of your investments. If you have questions regarding your holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
