Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you our specific advice on the fundamentals of successful investing. Each Investor Toolkit update gives you a fundamental portfolio management tip and shows you how you can put it into practice right away.

Today’s tip: “Invest for value, not on share price fluctuation.”

Stocks go up and down every day. Sometimes there is an obvious cause in good or bad news. But there’s a large random element to stock price changes, particularly over short periods.

Common portfolio management errors:

1. Becoming more “bullish” or optimistic because stock prices have gone up. Some investors only feel safe buying stocks after prices have risen. This is opposite to the way you make most purchases (cars, clothing, etc.) Ordinarily, it’s better to buy when prices go down, not up.
2. Becoming more “bearish” or pessimistic because stock prices have gone down. When other investors sell and drive prices down, you may wonder if they know something you don’t. However, random influences may be at work.

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To overcome these errors:

• Learn all you can about your investments. Frequently visit the web sites of the companies you invest in. Get on their mailing lists, and read their quarterly and annual reports. Ask your broker for research reports. Read the business news every day.
• Beware of advisor failings. Some advisors are “permabears” — perpetual pessimists. Others are blind to risk, so they recommend investing in speculative stocks at outrageously high levels.
• Take a broad view. Consider earnings, dividends and other factors in making portfolio management decisions. They matter far more than short-term stock-price trends.
• Invest consistently. Don’t follow a portfolio management strategy of trying to buy at the bottom or sell at the top. (As Bernard Baruch said, “This can’t be done, except by liars.”) Pick out a selection of well-established companies, and invest gradually over a period of years. Plan to hold indefinitely. You can always change your mind and sell if fundamentals deteriorate or your needs change.
• Practice “dollar cost averaging.” Invest the same dollar amount on a regular basis. That way you’ll buy more shares when prices are low, and fewer when they’re high. We analyzed the profit-generating potential of dollar-cost averaging in a recent Investor Toolkit update. Click here to read that article.

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