You may be tempted to stake out investment positions based on news headlines. Perhaps you thought about doing so when news was pouring out of Europe in recent weeks about Greece's debt crisis or when China's stock market stumbled.
Well resist the temptation, says Barry Ritholtz
, CEO of Ritholtz Wealth Management. And why?
- "News is factored into stock prices by the time it’s on the front page," he writes in The Washington Post. "These stories develop over time. The headlines tend not to come out of the blue but are the result of incremental events over months and years.
- "Headlines don’t drive markets. Profits and valuations do. These geopolitical events make for big splashy headlines, but ultimately have little effect on what matters to stock prices: corporate profits.
- "Guessing isn’t investing. Making big bets on outcomes that are a 50-50 probability is not investing, it’s speculation."
What you should do is focus on areas you can control, such as adopting an investment plan, keeping your costs low and avoiding short-term trading, Ritholtz says.
Elsewhere on the investment front, Peter Hodson, CEO of 5i Research, an investment research firm, has put together a list
of five important points investors should know, but may not.
The list includes:
- "Diversification does not need to be overly complicated," he writes in the Financial Post of Canada. "Most mutual funds hold hundreds of securities, which is why most funds can’t beat the market. Academic studies have proven that the additional value of diversification diminishes beyond 15 different securities." So keep your numbers down.
- "Dividend growth stocks beat everything else," Hodson says. Studies conducted by University of Pennsylvania finance professor Jeremy Siegel show that more than 90 percent of the stock market's long-term historical returns come from reinvested dividends. "Many investors make the mistake of seeking out high-yielding dividend stocks," Hodson explains. "But they may be surprised to know that, historically, a company paying a 1-percent dividend that can grow its dividend is far superior to a company paying a 7-percent dividend that can’t grow."
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