How to Buy Long Term Stocks

So you've decided to step into the ring of the stock market and plan for the long term. After all, one thing the stock market has taught us is that given a long time frame, you will make more money in stocks than almost anywhere else. Just look to the DOW or S and P Index as proof. Here are some tips on how to buy long term stocks.

Instructions

Difficulty: Moderate

1. Buy stocks in a number of different sectors. When it comes to investing in the stock market, diversity is your safety net. If you own stocks in technology, healthcare, oil, real estate and clothing and one of those sectors falls out of favor, then you still have the other 4 to carry the load. Look to diversity into between 5 and 7 sectors. And make sure you have an equal amount of money in each sector.
2. Determine what stage of investing you are at in your life. When you are younger, you have more time to be aggressive with your investments because retirement is 40 years away. However, when you are in your middle age and above, retirement is knocking on the door. So it stands to reason that when you are young you should be more speculative with your investments. A good rule of thumb is to be 50 percent speculative in your 20s and then reduce that by 10 percent each decade, until you retire and look for fixed assets that won't fluctuate (CD's and annuities).
3. Look for companies that are well established. Keeping your speculative money aside, take the rest of it and buy companies that have a long track record. Their brands are well established; maybe you even have a multitude of their products in your own home. (If you buy them and like them, then others will too.) The growth rate of these companies will be smaller and on average, the returns are less, compared to the newest fad company, but they will be safe. Remember that slow and steady wins the race.
4. Do your homework on your stocks every quarter. Just because you've purchased companies with a long established track record doesn't mean you simply forget about the company until you're ready for retirement in 30 years. You have to keep up on them. Make sure you listen to their conference call (readily available on the website). You are looking for something called a P/E, which stands for a Price to Earnings ration. This is the price of the stock divided by the earnings the company has per share of that stock. It is important to note that P/E varies wildly among sectors. While a tech company can easily have a P/E of 50 and be acceptable, a bank will usually be around 10.
5. Build your position in these companies over time. Because the stock market fluctuates, you never want to buy all of the stock in one company all at once. If you buy and it drops a few points, you are instantly under water. But if you buy in thirds, you insulate your position from downside risk. If the stock goes up, you've made money. Take the gain and don't worry about how much money it "could've been."
6. Resist impulse buys for your long term stocks. Remember your horizon is long term. Keep the impulse buys for the hottest craze for your speculative money.

Tips & Warnings

• When you first start to invest, seek the advice of a discount brokerage house. They'll give you the confidence to execute trades and not charge you an arm and a leg for their advice.
• Never buy long term stocks on margin (also called leverage). This means you are buying stocks with the credit of the bank. Like a credit card, you are charged interest. It doesn't make sense to pay 13 percent interest on a stock that's returning 8 percent a year. You'd be losing money.