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You Asked, We Answered . . .
Q: I’m a member of a new women’s investment club. What are some guidelines that we can use for choosing a stock to invest in?
A: That’s a broad question, and the answer depends a lot on the goals that your club has set for its investments. The good news is that, according to the National Association of Investors Corporation, women’s portfolios outperform men’s portfolios by 1.4 percent. So you have that trend in your favor. The first thing your club should do is decide on its investment philosophy. Is your club investing to preserve principal, for aggressive growth or steady, long-term gains? Do the members have an issue-oriented investment philosophy, such as concentrating on the stocks of Fortune 500 companies run by women—which as a group outperformed the market in 2003—or investing in environmentally sound companies, for instance? Do you want to stick with companies whose products you use? Would you prefer to concentrate on solid, large-cap, blue-chip companies with long track records, or add to your mix some small-cap stocks (stocks of up-and-coming companies, priced cheap, with more risk but a larger upside)?
Once you decide on your goals, you should set standards by which you will evaluate each company whose stock is under consideration for purchase. These parameters might include: how well does its performance compared with that of its competition (if the competition is cheaper and well-managed, maybe you should be buying it, instead); what is its price per earnings ratio (the price of a share of stock divided by earnings per share; higher is better.); does it pay dividends; how much debt does the company carry; what are its gross and net margins (i.e. how efficiently does it produce its product); what is its historical performance; how well is it managed; are its board members buying or selling the company stock; is it priced high, relative to past performance (look at industry trends; does it make sense to wait for it to come down in price before you add it to your portfolio?). Knowing when to buy and when to sell are two of the most difficult decisions to make. Follow the news closely and consider what economic and political factors might affect your stock, as well as merger trends in the industries in which you are invested. Might the company you are considering be a target for a takeover? Is the stock priced so high that it is due for a stock split?
As your group begins to build its portfolio, it’s important to maintain diversity in your holdings; spread your risk by holding positions across several industries, including real estate (through REITs), and consider adding a few bond funds. Spread your risk further by owning both foreign and domestic stocks. You can also utilize a system called “dollar-cost averaging” to minimize the risk of buying too high. Because prices fluctuate from hour to hour and day to day, by spreading your purchase of a particular stock over time—buying a certain number of shares every month until you have the number you want—you’ll avoid buying all your shares at their highest price.
As for other tips, in an upcoming article in MAKING BREAD, financial adviser Eve Kaplan recommends exchange traded funds, a relatively new kind of index fund comprised of stocks that track an index (such as Standard & Poor’s 500 or the NASDAQ 100). Owning ETF’s, or any index fund, for that matter, is a quick and economical way to diversify your holdings. For extra security, your group might add to its mix TIPS, or Treasury Inflation Protected Securities, which are a type of bond fund that has a built-in hedge against inflation. Visit www.ishares.com for a list of domestic and foreign ETF’s.
For more information on how to value a stock or structure your investment club, visit these two excellent sites: www.chickslayingnesteggs.com and www.better-investing.org.
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