By Saghir Aslam
Irvine , CA
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
The key to long term successful investing is proper diversification. Diversify within sectors.
Be Careful Not to Over Diversify.
Don’t Diversify to the Point of Mediocrity.
Wall Street has long preached the gospel of diversification. But chances are the strategy will hurt your returns more than it helps reduce your risk. Buying a slew of stocks in a variety of industries may seem like a safe bet. After all, if one or two issues tank, you won’t suffer much damage. But the opposite is also true. Even if you hit one or two winners, your portfolio’s overall gain will be weighed down by its laggards.
Diversify enough and your portfolio will start to resemble the major market averages that you’re trying to top. Your goal is to beat these averages by picking winners.
Whether you’re just starting your investment journey or continuing along a well-worn track, placing the bulk of your money in your strongest stocks is usually the winning proposition. While you may be placing all your eggs in one basket, you‘re betting on the basket with the best chance of yielding the golden egg. Quality stock selection and disciplined trading offsets the risk of a concentrated portfolio. Through Monday, 250 stocks priced at $12 or higher at the beginning of the year had at least doubled since then. That represents only a small percentage.
But how do you find these rare winners?
Start by looking for leading stocks in leading industry groups. These have the greatest odds of climbing to new heights. Stocks owe roughly half of their price movement to their industry group, so picking a stock in a top group increases your odds of snatching up a winner.
You also want a stock that stacks up well against its peers. Companies with Relative Price Strength Ratings of 80 or higher are outperforming 80% of all other stocks. Ideally these stocks also should have Earnings Per Share Ratings of 80 or higher. That shows they have a track record of expanding their profits.
Has your potential thoroughbred also caught the eye of mutual fund managers? This is a key point if your stock is being bought by mutual funds and institutions your chances are greater for success. As a matter of fact you should avoid the stocks not held by institutions (big boys).
Once all of a stock’s fundamentals are in place, buying at the right time can help you reap the biggest rewards. Ideally, the best time to get into a stock is when it has just finished a consolidation lasting seven weeks or longer. Historically many of the market’s superstars started their biggest runs after such base building periods. You could do cost averaging as well. At times I have bought a single stock four different times. This in most cases has given me a better average price.
Be religious about cutting your losses in stocks that have dropped 8% or more from the purchase price. Shift the money to your better performing bets. Many people make this mistake over and over again. They hold on to losers sayings it’s a great company – it will go up. They keep hoping. Money is not made hoping, face the facts.
By carefully pruning your poorer holdings and adding to stronger stocks, you’ll wind up with a concentrated portfolio of market leaders. Limiting your investments to a few stocks also makes it easier to keep close tabs on your portfolio.
If you’re invested in a large numbers of stocks, it’s difficult to diligently watch the price movements of each. And bad news almost always shows up in a stock chart before the headline crosses the wire.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)