Edge Alert: 3 Hot Stock Tips...
“So Davis, if I’ve got a bit of money that I don’t need for 6 months, where should I invest it?”
This is the question I got from my mother just this past weekend, which is actually a question that I get a lot from both family and friends.
Everyone wants a hot tip on a stock that I think will quickly shoot higher.
And to these requests I always have the same response. Which leads me to my 3 critical rules of thumb for any successful investor…
This past weekend, I took a break from studying for the CFA exam to attend a good friend’s wedding in my hometown.
It’s nice to get out of the city grind every now and then. And it also gave me a chance to see my family — something I don’t do nearly enough.
But that one conversation about investing with my mother over the weekend has since been stuck in my head.
Whenever I get this question I always give the same answer… I start with how I’m not legally allowed to give out personalized financial advice, even if it is my own mother, and then on top of the legal aspect, I don’t even want to be giving out personal financial advice.
That’s because there are so many factors that go into a personal portfolio like time horizon, allocation, risk aversion and more.
If I were to just name any random stock that I think is undervalued, I could potentially be doing more harm than good.
That’s because it’s important to consider individual investments in the context of your whole portfolio.
For example, what if I named Intel — a Daily Edge favorite — and cited its commitment into the self-driving car revolution as a reason for buying.
Sure Intel is a great company that has performed well over the last few months, but what if my mother already owns Nvidia and AMD?
Adding Intel (another semiconductor manufacturer) to her portfolio creates unnecessary risk because she’s not properly diversified.
What happens if demand for semiconductors stalls?
Not only will her new Intel investment fall, but so will her similar positions in AMD and Nvidia.
Diversity is the name of the game when it comes to your retirement…
Here’s What Else I Told My Mother…
That’s right. I told my own mother that if she’s looking for a way to make quick money off her savings, Las Vegas was just as good as the stock market.
That’s because even the best companies go through down periods. Just look at the FANG stocks this year.
All four of these high-flyers have traded sideways or lower for multiple consecutive months at some point this year.
- Facebook traded sideways from July until just this week when the stock broke higher
- Amazon traded lower over the last 5 months before reporting earnings last week
- Netflix traded lower from July to September of this year
- Google traded lower from June to just last week when they reported earnings
So depending on when my mother got in on a trade, even the stocks posting the highest gains this year could return poor results.
And this doesn’t even take all the risk into account!
Not only are these stocks not “guarantees” in random multi-month periods, but there have been multiple instances of huge price falls in the same time period.
Does my mother have the stomach to hold on to a swing trade when the value drops 7% like Google did in June, 8% like Netflix did in August, or even the July to October period when Amazon traded 8% lower?
Like she said, in 6 months she’s going to need that money for something. So watching 8% off the top disappear in days could be tough to swallow.
That’s why I want to share my 3 investment rules of thumb for you today. A few things I think about before every investment I make…
Rule #1: It’s All Relative- Think about individual investments in the context of your whole portfolio. It’s no secret the stock market is at all-time highs. Therefore your portfolio needs to be prepared for the inevitable pullback. We here at The Daily Edge recommend gold.
Rule #2: Pace Cars Not Race Cars- Take a long-term approach to investing. Even the best stocks move lower over short periods of time. But keeping positions over many years while collecting dividends along the way is an efficient way to grow your wealth.
Rule #3: Pigs Get Slaughtered- Don’t get greedy. I’m talking about knowing when to sell. Yes, I’m a long-term investor, but if the stock runs up quickly, taking gains off the table early allows me to redeploy my capital elsewhere. And the best part — you don’t need to sell it all. Try selling half and quarter positions to lock in a quick profit, while still giving yourself the opportunity for bigger gains in the long-run.
Keep these tips in mind as The Daily Edge brings you more investment opportunities in the future.
Here’s to keeping your edge,