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Eight Ideas for Improving Next Year's Returns

Here are eight suggestions that could help you be a better investor in 2016.

#1 Slow and Steady
When it comes to the stock market, the fable about the tortoise and the hare is true. Successful investors get rich slowly. Avoid the temptation to swing for the fences.

#2 Put Compounding to Work
Compounding means that you reinvest your returns rather than spending them. Thanks to the power of compounding; a regular investment plan can yield surprising results. For example, say you start with nothing and invest $100 every month. Assuming 10% annual returns (roughly equivalent to the overall market), you’ll have $21,000 after 10 years, $77,000 after 20 years, and $228,000 if you stick with your plan for 30 years. 

You can benefit from the power of compounding by committing to an automatic investment plan. The easiest way to do that is by setting up an account with a broker or mutual fund that automatically deducts a fixed amount from your bank account every month.

#3 Take a Long View
Avoid making decisions based on recent market action. As a group, individual investors pour money into hot markets just before they cool, and shun weak markets primed to soar. The market can turn on a dime. You’ll often miss a major move by the time you realize what has happened.

#4 Ignore Market Gurus
It’s scary when you hear that the guru who predicted the last bull market is now forecasting a crash. But, there’s always someone predicting just about anything. Just because one of them got it right once doesn’t make them Nostradamus. Make your decisions based on a firm’s fundamental outlook, not on market predictions.

#5 Avoid Decisions Based on Interest Rates, Etc.
Many smart people have gone broke by betting wrong on which way interest rates, the price of gold, the value of the dollar, or oil prices are heading. Avoid investments that depend on such predictions for success.

#6 Consider Dividend Stocks
Without dividends, the only way you make money on a stock is by selling to someone else at a higher price. But dividend-stocks pay you to own them so you can make money even if they don’t go up.

#7 Diversify
It’s tempting to load up on stocks in today’s hot industry. In times past, that strategy worked because once in favor, an industry often continued its winning ways for years. No more. Now, an industry can turn cold overnight.

Instead, reduce your risk by diversifying. A sector is a major segment of the economy such as industrials, consumer goods, healthcare, technology or financials. Avoid investing more than 25% of your funds in any one sector.

An industry is a part of a sector such as social networking stocks (technology) or regional banks (financials). Avoid investing more than 10% of your funds in any one industry.

#8 Don’t Check Stock Prices All Day Long
Stocks make short-term up and down moves for unfathomable reasons You’ll drive yourself crazy checking on your stocks too often. Once a  day is plenty and once a week is better.

Have a happy and prosperous New Year.

published 12/28/15

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