For some "long term" would mean holding a stock position over the weekend. For others, it may mean holding a security for at least 1 year for the purpose of declaring a long-term capital gain, thus saving on taxes.
The rigid definition of a long-term investment in the stock market would be holding a security for a minimum of 5 years, to as long as 30 years.
I'm going to tell you my definition of a long-term investment in a security by telling you a story. A true story!
My Mother worked as a teller in a small bank in Dover, New Jersey. The name of the bank was called The Dover Community Bank. While working at the bank (she eventually became a branch manager) she enrolled in the bank's dividend reinvestment plan, making purchases of the stock through pay-roll deductions from her paycheck. She continued purchasing the stock through the years, having the dividends from her shares in the bank reinvested into more shares every quarter. By the time she left the bank (in the early seventies) she had accumulated around 300 shares of The Dover Community Bank.
My Father, when he retired, had the dividends from those shares sent home ? to help ends meet. When my Dad passed away at age 80, my brother and I inherited over 7,600 shares of The Bank of New York, all originating from those 300 shares of what was once called The Dover Community Bank.
So, through this individual experience I have adopted my own opinion of what is called a long-term investment in a security. It is simply this ? securities should be purchased with the intent of providing dividend income to help ends meet during retirement, with the understanding that no one can successfully retire without financial freedom.
So every investment now in a security would be purchased with the intent of holding that security (and adding to it during the years) until the dividend income from that security is ample enough to ease the loss of income from retiring from my job. Now, I not only provide for myself during my retirement years, but will leave this earthly realm knowing that I will also be able to relieve some financial burdens for those I've left behind.
With this definite, concrete purpose for investing in mind, a definite, concrete plan would need to be created (and can be found in my book The Stockopoly Plan) to achieve this long-term investment goal. My Mother invested in only one stock and got lucky ? a considered plan would diversify.
If I am going to hold a security position forever, what criteria should I be looking for in that security? Certainly, dividend income ? that's a given! And since I never intend to sell the security, capital gains may not even be an issue (more on this later).
So then, what else? I would argue that a company that just pays a dividend isn't good enough. Instead, I will only purchase those companies that have a long history of raising their dividend every year. This will eliminate a whole bunch of risk. It would eliminate the possibility that the company is 'cooking their books;' after all, the money has to be there to pay the shareholder. And because this company has been raising their dividend every year for many years, it eliminates the risk of investing in a start-up company that may not even be around in a year or so.
Also, the rising dividend every year would help off-set the risk of inflation and the risk of a lower stock price during the year would actually accelerate my income from the security.
Since I would want my position in the stock to grow through the years, thus increasing my dividend income, all dividends would be reinvested into the stock, until retirement. A lower stock price, therefore, would purchase more shares, at a higher dividend yield and would simply accelerate my dividend income.
Now the question may arise, when would I want to sell a stock? Certainly not because a Merrill Lynch has downgraded the whole sector ? that's a blessing in disguise ? a temporary lower stock price just means a higher dividend yield, allowing my dividend to purchasing more shares.
The question of when to sell a stock puts me in the mind of a quote I once read by Jacobsen ? "Judgment is the one thing you cannot learn at college. You either have it or you don't have it." The time/reason to sell a stock varies. If there comes a time when you have so much money tied up in just one stock position that it's making you feel uncomfortable, sell some of it. If the company you purchased stopped raising its dividend you may want to lighten up and/or divert the funds you were putting into that security into one that is continuing its program of increasing their dividend every year.
A company may trim their dividend ? when and if this happens (and it does) my advice is not to be overly anxious to sell the stock. Find the reason why the company is trimming their dividend. It may be to reduce debt or for the possibility of acquisitions. The company's dividend yield may have been around 6 percent, and all their peers' dividend yields are around 4 percent. Certainly, do not add to your holdings in this company, but give management a chance to see how they handle the extra cash, since they appear to have better use for the money, other than to pay their shareholders. The resulting growth in that company may make up for the lower dividend yield and two or three years later you'll get a better perspective on whether to sell the company or not (or to continue adding more shares through new monies, or simply to allow the dividends to continue purchasing the stock).
For more excerpts from the book 'The Stockopoly Plan'
Visit: http://www.thestockopolyplan.com
You have permission to this article either electronically or in print as long as the author bylines are included, with a live link, and the article is not changed in any way (typos, excluded). Please provide a courtesy e-mail to charles@thestockopolyplan.com telling where the article was published. (word count 986)
Charles M. O'Melia is an individual investor with almost 40 years of experience and passion for the stock market. Author of the book 'The Stockopoly Plan - Investing for Retirement', published by American-Book Publishing.
Wood Dale Chicago prom limo .. Lockport Chicago limo O’HareNever lose money in the stock market again. Yeah, I... Read More
How is it possible that trash Companies are posting less... Read More
Recently I was invited to appear on a live CNNfn... Read More
It is difficult to make money in a bull market,... Read More
Peter is a professional trader, Paul is not. Peter has... Read More
Its dinnertime and the phone rings. It's Joe Noname with... Read More
Today's society gives special recognition to alcoholics, sexaholics, binge-aholics, shopaholics,... Read More
Congress recently passed another new law that is supposed to... Read More
The following are a list of nine things you want... Read More
Index Fund Trading can be one of the most profitable...or... Read More
Exchange Traded Funds (ETFs) are growing. Investors are choosing low... Read More
In my opinion, due to the volatility of stock market... Read More
The stock market has not been very kind to your... Read More
Spread trading is a technique that can be used to... Read More
I have been trading for several decades and was an... Read More
Are you paying any attention to your retirement savings? Do... Read More
Do you have a financial planner? Does one of your... Read More
After some forty years of banking and investments, I retired... Read More
It's about time someone spoke the truth concerning outsourcing. The... Read More
Most advisors will tell you they can beat the market.... Read More
We have two candidates for president that have really different... Read More
When purchasing mutual funds we are cautioned to read the... Read More
Have you been listening to the talking heads on CNBC-TV?... Read More
Did you run out to buy that duct tape yet?... Read More
For years I have been saying you must have a... Read More
Antigo wedding limo ..I made my very first investment in the stock market... Read More
The following are a list of nine things you want... Read More
I am taking the time to help others learn the... Read More
What is leverage?Here is a definition of leverage from an... Read More
It is commonly reported that the stock market averages about... Read More
Buy high and sell low -- It's not a typo.Millions... Read More
IT'S REMINISCENT OF THE OLD children's tale about an old... Read More
Inverted interest rates? What's that? Who cares? Even if you... Read More
How can you dispel an illusion unless you look directly... Read More
Wall Street has been preaching the doctrine of Buy and... Read More
Economists know more about how the fragments of society work... Read More
Is really not as important as to how you invest... Read More
When you stand on the ocean shore and watch the... Read More
Reach in your pocket and take out that big roll... Read More
Are you attracted to the idea of being in control... Read More
Since I can remember, and that's a long time ago,... Read More
∙ Make every investment in the stock market a long-term... Read More
The gleam and bright lights of Wall Street lure in... Read More
I often hear from people, "I don't trade. I invest.... Read More
The Shadow knows. Remember him? It seems a shadow has... Read More
Every day I hear someone on CNBC proclaim that "this... Read More
Suppose your position has made a big move and you... Read More
Dollar cost averaging is one of the most popular ideas... Read More
First let's see what protectionism is. According to Mr. Webster... Read More
When you invest in the stock market for ever-increasing cash... Read More
Stocks & Mutual Fund |