Some people avoid investing because they’re afraid to lose money. Some say that stock prices go up and down with news, making them unpredictable, and that it feels like gambling when they buy stocks.
Here are several tips to make investing easier and to help you avoid losing money.
Focus on the business
Invest in quality companies with strong fundamentals, such as Toronto-Dominion Bank (TSX:TD)(NYSE:TD). These companies can be identified by growing earnings.
For 18 years, TD’s earnings have increased in a general uptrend. It rose 315% from $13 to $54 per share while paying dividends along the way. This is the kind of business that creates long-term wealth for investors.
Check valuations
Choosing a great business is only the first step. Investors should check whether the stock is expensive or not. If it’s overpriced, investors should wait because share prices always revert to the mean.
In the past 10 years, TD has normally traded at a multiple of 12.3. At $54, it trades at 11.5 times its earnings. So the shares are essentially at fair value.
Dividends
There’s another way that stocks such as TD help investors avoid losing money. TD pays a dividend. Dividend stocks provide psychological benefits because even in a down market, shareholders still get a return from dividends.
Moreover, in recent history TD has tended to hike its dividend and maintain it at other times. Since 1998 TD’s annual dividend payout was $0.33 per share. This year it’s projected to be $2.16 per share. In 18 years, TD’s payout increased by 555%! Folks who bought and held TD would have gotten that investment capital back in dividends by 2013.
The best thing about buying quality dividend-growth stocks is that you can buy them at reasonable prices, hold them forever, and collect regular dividend paycheques forever.
Diversification
As good a business TD is (or any other company for that matter), investors should not be overly concentrated in it or in any single sector, especially if you’re relatively new to investing.
Imagine having 25% of your portfolio in one stock and it falls 50%. That’d equate to 12.5% of unrealized losses. Even great businesses can have a bad year. For example, in 2002 TD’s earnings per share fell 80% and its shares fell about 36% from a peak to a trough.
So, there are psychological benefits to diversifying across quality businesses in different industries and sectors.
Conclusion
Investors should focus on identifying quality businesses that have a tendency to grow earnings. It’d be best if these businesses pay dividends. Don’t forget to buy them only when they’re reasonably priced or discounted. Buy a basket of such companies and collect their dividends.
