Step-by-Step Instructions on Stock Investing - Cabot Wealth Network

Step-by-Step Instructions on Stock Investing

Step-by-Step Instructions on Stock Investing

Portfolio Development for Retirement

A Low-Risk and a Medium-Risk Recommendation


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I always find several excellent ideas among the comments and suggestions from our Cabot Wealth Advisory readers-and some can even lead to lessons for all investors.

One reader recently wrote, “I am interested in step-by-step instructions on stock investing.” Another reader asked, “How should I develop my portfolio for retirement?”

Rather than give you my own opinions exclusively, I decided to incorporate the advice of the American Association of Individual Investors. The AAII is an independent nonprofit begun in 1978. AAII’s goal is to assist individuals in becoming “effective managers of their own assets through programs of education, information, and research.”

AAII offers unbiased educational material online and in a monthly magazine. Go to for further details.

AAII divides the investment life of an individual investor into four phases:

Phase 1 begins as soon as you become employed for the first time. (My first job was decades ago in Boston as a stockbroker trainee at $80 a week at Paine, Webber, Jackson & Curtis). As soon as your income begins to exceed expenses, establish a cushion for emergencies. Your cushion will need to grow to the equivalent of six months of your income. You can fund your cushion by investing in no-risk investments such as savings accounts at your bank or money market funds at a brokerage firm.

One of the cornerstones of wealth-building is being frugal. You should set reasonable savings goals and then live below your means. You gain financial independence by budgeting, controlling expenses, and saving a reasonable portion of your income.

When you have accumulated the equivalent of six months of your income and if you haven’t piled up a lot of debt, you are ready to move on to Phase 2. If your debts from college loans, car loans, credit cards, etc. have become excessive, you will need to reduce your debt before moving on to Phase 2.

Phase 2 gets exciting. Any savings above your cushion can now be invested into mutual funds, ETFs (exchange traded funds), stocks or bonds. Some advisors encourage investors to invest in mutual funds and exchange traded funds first, and then stocks when your portfolio reaches certain levels. I recommend investing in whatever interests you the most, because you will probably be more motivated to learn about what appeals to you.

Phase 2 is the most important step in your investment career. You need to establish a solid foundation of investments that you can build upon in future years. I believe investing in a combination of ETFs and common stocks is a reasonable approach for new investors. I do not study mutual funds, so I am not qualified to offer advice on a mutual fund strategy, although mutual funds may also play an important role in your portfolio.

Your initial investments should be growth oriented, but conservative. I recommend low-risk companies with solid five-year growth prospects. I recommend undervalued, high-quality companies in my Cabot Benjamin Graham Value Investor. I scan more than 1,000 companies every month and pick stocks selling at modest prices with expected earnings growth of at least 10% per year. I want companies that pay dividends. I will recommend non-dividend paying companies if I think the company will start paying dividends within the next couple of years, or if I believe the company’s stock price will appreciate more than average.

The best route to financial independence is slowly accumulating wealth, not a fantasy of get-rich-quick investing. Don’t expect to double your money every year. According to AAII, the average annual return for common stocks is 10% to 12% per year during the past 85 years. Nevertheless, an individual who invests $10,000 at the age of 27, adds $2,000 every year to his or her account for 35 years, and can average 11% annual returns including dividends, will end up with a cool $1,069,000 at age 62. Average annual returns of 11% are quite attainable if you aim for 9% price appreciation plus 2% dividend yields. The most difficult part is to make a plan and stick to it!

Every month, I assemble a list of 16 stocks and ETFs to help investors choose conservative stocks and ETFs to buy. Investing in any or all of these choices will get you started in the right direction and will provide a solid foundation for your investment portfolio. I believe the SPDR S&P Dividend ETF (SDY) is the best place to start. If you have limited funds, start with SDY because it is an exchange traded fund, similar to a mutual fund, with a diversified portfolio containing all companies in the S&P 1500 Index which have raised their dividends every year for the past 20 years. The objective of the SPDR S&P Dividend ETF is to include companies which have increased their dividends consistently. The current dividend yield is a very attractive 2.63% yield. Only 98 qualify out of 1,500 companies!

If you would like more information about the SPDR S&P Dividend ETF and the other 15 stocks included in my list of current buy recommendations, click here and become a subscriber to the Cabot Benjamin Graham Value Investor. I strongly believe it’s the best investment you’ll ever make.

Phase 3 begins after your initial investments start to show noticeable profits. Your initial stocks should be held for the long haul, unless the industry or the company falters badly. Sell a stock if the long-term outlook has deteriorated and replace the stock with a better one.

Assuming you haven’t accumulated a lot of debt, you are ready to start adding investments to your core portfolio. Rather than staying conservative, now is the time to start investing according to your personal preferences. If you are a gambler, invest aggressively, but not foolishly. If you are conservative, then stay with low-risk stocks, ETFs and mutual funds.

I advise adding stocks that are clearly undervalued and stocks with exceptional growth prospects. In addition, you might want to add to some of your smallest core holdings, but be sure each company’s outlook remains healthy. I also recommend offsetting your aggressive investments with defensive ETFs. You should be prepared to jettison risky stocks that underperform and sell stocks that become overvalued.

Every month, I compile another list of 16 stocks recommended to buy that are moderate-risk for the more aggressive portion of your portfolio. The 16 moderate risk stocks typically include a diverse array of undervalued growth stocks. One of the companies I currently recommend is a little-know company located in Vancouver, British Columbia: Avigilon Corp.

Avigilon (AVO) is a leading designer, manufacturer and marketer of network-based video surveillance systems, surveillance cameras, video analytics and other security equipment. The company is small with $275 million in sales and a market capitalization of $825 million. Avigilon shares sell on the Toronto Stock Exchange under the symbol AVO and on the U.S. Over-the-Counter (OTC) Market with the symbol AIOCF.

Avigilon is selling at a bargain price and offers exceptional price appreciation potential.

If you would like more information about Avigilon and the other 15 stocks included in my list of moderate risk buy recommendations, click here and become a subscriber to the Cabot Benjamin Graham Value Investor. At just $87 per year, you can’t go wrong.

As your investments grow and you invest in more stocks, you will need to decide how many stocks, mutual funds and ETFs are reasonable for you to follow. When you reach your limit, add to stocks that you already own.

Phase 4 begins about five years before your retirement. At this point in your life, you should start to reverse your investment strategy. Initially, start selling some of those risky companies that you love. Invest the proceeds into ultra-conservative investments such as certificates of deposits (CDs), money market funds, bonds or low-risk ETFs and stocks.

Your goal in Phase 4 is to get back to owning very safe, conservative stocks (your core holdings), money market funds, CDs and bonds. I advise selling stocks that aren’t paying dividends. If you need to be ultra-conservative, sell almost all of your stocks and invest in shorter-term bonds, CDs and money market funds. When you retire, your main goals should be not to lose money, and to invest conservatively.

One of the most important attributes that an investor must acquire is patience. The stock market can be a very frustrating place because of its unpredictability. Expect to lose money from time to time. Have confidence in your investment decisions. “If a business does well, the stock eventually follows. Our favorite holding period is forever,” states Warren Buffett, one of the greatest investors of all time.

Until next time, be kind and friendly to everyone you meet.


J.Royden Ward
Chief Analyst, Cabot Benjamin Graham Value Investor

Editor’s Note: You can find additional stocks selling at bargain prices in our new and improved Cabot Benjamin Graham Value Investor. Find out why our subscribers are showering us with compliments!

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