How to Make Money by Stock Investing -- Safely and Profitably!

Stock investing is one of the safest and most profitable ways of making money, if you know what you're doing. Though there are different investment strategies, I find the strategy of buying diversified and cheap stocks to be the safest and most profitable.

INVESTING SAFELY

Index funds are mutual funds that match stock market indexes. The major stock market indexes are as follows: Standard & Poor's 500, Russell 2000, Wilshire 5000, Morgan Stanley EAFE, and Morgan Stanley Emerging Markets.

Since index funds are well diversified and tend to steadily increase in long-term value, they're a very safe investment.

INVESTING PROFITABLY

Nevertheless, if you want to profit from stock investing, you must sell stocks at a higher price than you bought them for. So it's important to buy good quality stocks cheaply. How do you buy stocks cheaply? The answer lies in the price-to-earnings ratio (P/E ratio) of a stock.

As a general rule of thumb, if a good quality stock has a P/E value in the 0-10 range, it's undervalued; in the 10-17 range, it's fairly valued; in the 17-25 range, it's overvalued.

INVESTING SAFELY & PROFITABLY

Not only do individual stocks have P/E values, but index funds have them as well. Given this, you can invest in an index fund that has a lower P/E value than the other index funds.

Investing in a low P/E index fund, you're investing safely and profitably.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Open an account with a discount brokerage firm such as T. Rowe Price (troweprice.com), Vanguard (vanguard.com), or TD Ameritrade (tdwaterhouse.com).
• On your personal computer, bookmark "Yahoo! Finance" at http://finance.yahoo.com/

1. Find the index funds that your discount brokerage firm offers. Print out or write down the names of the index funds, along with their corresponding ticker symbols.
   
   For example, if your discount brokerage firm is Vanguard, you'll print out or write down the following index funds: Vanguard Balanced Index Fund Investor Shares (VBINX), Vanguard 500 Index Fund Investor Shares (VFINX), Vanguard Dividend Appreciation Index Fund Investor Shares (VDAIX), Vanguard FTSE Social Index Fund Investor Shares (VFTSX), Vanguard Growth Index Fund Investor Shares (VIGRX), Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX), Vanguard Large-Cap Index Fund Investor Shares (VLACX), Vanguard Total Stock Market Index Fund Investor Shares (VTSMX), Vanguard Value Index Fund Investor Shares (VIVAX), Vanguard Extended Market Index Fund Investor Shares (VEXMX), Vanguard Mid-Cap Growth Index Fund Investor Shares (VMGIX), Vanguard Mid-Cap Index Fund Investor Shares (VIMSX), Vanguard Mid-Cap Value Index Fund Investor Shares (VMVIX), Vanguard Small-Cap Growth Index Fund (VISGX), Vanguard Small-Cap Index Fund Investor Shares (NAESX), Vanguard Small-Cap Value Index Fund (VISVX), Vanguard REIT Index Fund Investor Shares (VGSIX), Vanguard Developed Markets Index Fund (VDMIX), Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX), Vanguard European Stock Index Fund Investor Shares (VEURX), Vanguard FTSE All-World ex-US Index Fund Investor Shares (VFWIX), Vanguard Pacific Stock Index Fund Investor Shares (VPACX), and Vanguard Total International Stock Index Fund (VGTSX).

2. Go to "Yahoo! Finance" at http://finance.yahoo.com/
   
   In the upper left corner, you'll notice a "Get Quotes" box.
   
   For each index fund, enter its ticker symbol into the "Get Quotes" box.
   
   Then click on the "Get Quotes" button.
   
   In the left margin of the new page, you'll see a list of links. Click on the "holdings" link.
   
   Now if you scroll down this page, you'll see "Price/Earnings." For each ticker symbol, write down its "Price/Earnings" value.

3. Whichever ticker symbol has the lowest "Price/Earnings" value, that's the one you should invest in.
   
   For example, just now (01/12/08), I compared all the ticker symbols for Vanguard's index funds to see which one has the lowest P/E value. Though ticker symbol VEURX has a P/E value of 14.00, its P/E value is the lowest one of all.
   
   So I invest in VEURX (Vanguard European Stock Index Fund Investor Shares). Right now, VEURX has the lowest P/E value, but this can change over time.

4. Set up your checking account so that a certain amount of money is automatically withdrawn and invested into your chosen index fund every month. Let this automatic investment continue for about 10 years or more.

Tips & Warnings

• Keep a cool head. Don't get emotional.
• Invest long-term, instead of short-term. Long-term is about 10 years or more.
• Do your research carefully and thoroughly. Index funds should always be logically chosen, never emotionally chosen.
• Don't panic. The values of index funds can go up or down at any time -- sometimes abruptly. That is normal. Just know that in the long run index funds increase significantly in value, and are well worth the investment.
• If you're expected to die within 10 years, this investment strategy may not be the right one for you.

Resources

• The Guaranteed Cure for Failure
• Investopedia

[tjzerrer]

on 6/22/2009 You're right. Emotions need to be checked at the door. Thanks for the info.