Important principles to keep in mind when investing in the stock market
Debt problems in the Euro Zone. A real estate bubble in China. Tensions in the Middle East. These headlines appear constantly in newspapers. At the same time, a growing public debt problem in America has caused many pundits to predict the downfall of this country. With these seemingly endless issues, what are some important principles to keep in mind when investing in the stock market?
- The U.S. remains the best place in which to invest. According to the Federal Reserve, household debt has fallen in 13 consecutive quarters and corporations hold record levels of cash with which they can use to withstand any exogenous shocks to the economy, to hire new employees, or to increase their capital expenditures . Also, the US dollar Index, which tracks the value of the dollar against a broad basket of other currencies, including the euro and the yen, rose by 7.95 over the past year.
- Do not invest only in stocks that have increased in value in the past year. Academic studies have shown that a stock that had just reached its 52-week high historically has appreciated in value over the following 6 months, but then declined in value between the following 6 and 18 months. For investors seeking to receive the benefits of both momentum stocks (those stocks trading near 52-week highs) and value stocks (those stocks not trading near 52-week highs and trading at low multiples relative to their earnings), we recommend an investor routinely monitor his or her portfolio in order to obtain a satisfactory balance between the two types of stocks.
- Be greedy when others are fearful. Stock market declines are almost as regular as a snowstorm in New England in January. Look for quality companies with strong fundamentals that will continue to generate earnings well into the future. In Peter Lynch’s 1992 book “Beating the Street”, he wrote that if you had put $1000 in the S&P 500 Index on January 31, 1940, you would have had $333,793.30 in 1992. However, if you added another $1000 every time the market dropped 10 percent, your investment would have been worth $6,295,000.
*The opinions and forecasts expressed are for informational purposes only and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. The representative does not guarantee the accuracy and completeness, nor assume liability for loss that may result from the reliance by any person upon such information or opinions. Past performance does not guarantee future results.
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Hough, Jack. Why the U.S. May Be Your Best Bet. 3 Jan 2012. The Wall Street Journal. 3 Jan 2012.
US Dollar Currency Index. 23 May 2012. CNBC. 23 May 2012.
Lynch, Peter. Beating the Street. July 1992. 23 May 2012.
Securities offered through Securities America, Inc. Member FINRA / SIPC. Advisory Services offered through Securities America Advisors, Inc., an SEC Registered Investment Adviser. Armstrong Advisory Group and the Securities America companies are unaffiliated.
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