Throughout the past 15 years, everyone has witnessed a raging bull running ferociously through the U.S. stock market, driving endless optimism into investors. A seemingly perfect scenario exists in our economy that allows stocks to thrive: Strong earnings, low inflation, and a healthy bond market are a few of the factors that continue to boost the stock market to record finishes. However, despite record highs and devastating plunges, investors who chart their course over the long run produce outstanding results. The following story illustrates the benefits of long-term investing.Investor A and B each buy 10 different stocks with $1,000 invested in each stock. Investor A sells all his stocks every year, and buys 10 more each year for 20 years, paying commission and taxes. Investor B leaves his stocks alone for 20 years. At the end of 20 years Investor A has $17,000, while Investor B has $87,000. That’s a difference of $70,000! The moral of the story is to let your investments grow! Long-term investments usually range from three to five years. If the selected stocks meet the investor’s expectations, then a long-term investment often stretches into years. A great advantage of holding on to stocks is avoiding the nasty capital gains tax. The recent capital gains cut lowered the tax percentage from 28 to 20 percent, provided the stockholder holds the shares for at least 18 months and the transaction was made on or after May 7, 1997. Luckily I purchased Microsoft shares on May 7, so I fall under the 20 percent bracket.A common mistake that investors make is diversifying their portfolio with 20-30 stocks in order to spread out the risk involved. In other words, they’re not placing all their eggs in one basket. Just remember that a person can be very successful throughout their lifetime by investing in only a few stocks. Investors in the past have learned that with Intel, Microsoft, Wal-Mart and Procter & Gamble.A great way to succeed is to make a set of investment goals. Analysts usually recommend allocating 15 percent of your gross income for investments. Setting aside a fixed amount of money every paycheck to invest is called “dollar cost averaging.” The benefit of cost averaging is that money is constantly placed into stocks. Let’s say that instead of cost averaging, you had all of your money saved in cash, waiting to buy the stock at a low price. If the stock surges and you have no shares, then you lose out! However, if your money is busy purchasing a stock that then surges, then you benefit from the gain. Building a powerful portfolio takes time, research, and patience. If uncertainty arises about an investment, seek advice from a broker or someone who’s had experience in the markets. This might cost a little, but for beginning investors, it is definitely worth it. The life of a long-term investor is less stressful and free from day-to-day worrying about the market. However, investing long does not ensure that all stocks will surge. Many investors keep track of their portfolio with up-to-date news and market quotes. I believe spreadsheets to be the best way to monitor progress. If you create a graph of a stock’s past performance and it is not meeting your expectations, then perhaps you should discontinue placing money in that stock.Every time you add to your portfolio, you are greatly increasing the potential for a fantastic return. I strongly believe the market will continue to reach many more record setting sessions this year. Of course occasional sell-offs and minor corrections will always occur on Wall Street. Assuming all things remain constant (ceteris paribus), I am a firm believer that we will witness DOW 10,000 before the year 2000!
Kevin Michael Vore is a freshman.
