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| Fountain of Wealth 3 (Photo credit: Wikipedia) |
New York, May.14, stocks to watch .- Investors want to make money. That's why they save instead of buying a new 60-inch TV. That's why they consume financial media and conduct their own research.
That's why they put their hard-earned money to work...
... but then they do the exact opposite of what will actually increase their net worth.
It's proven that while many investors have good intentions, they often make moves that destroy their wealth.
Let me show you the top three ways to avoid these pitfalls...
Wealth-Building Tip #1: Don't Invest in Bond Funds - One of the quickest routes to the poorhouse is to invest in mutual funds or ETFs that invest in bonds.
Now, that doesn't mean you shouldn't be investing in fixed-income assets. There's nothing wrong with putting a small portion of your assets in bonds - whether it's Treasurys, munis or corporates.
But unlike a bond that you can hold until maturity and then have all your capital returned, a mutual fund or ETF rises or falls in price depending on the value of the bonds it holds.
Therefore, in a low interest rate environment like we're in now, the likelihood of making money (or even recovering all of your initial investment) over the next few years is slim.
That's because as interest rates rise, bond prices fall. And with interest rates so low, there's very little room for them to fall further. Therefore, rates will undoubtedly head higher in the not-so-distant future.
That means prices must fall.
Wealth-Building Tip #2: Don't be a Hoarder - You should have a cash stockpile that's equal to roughly six months' worth of expenses in case you suddenly lose your income stream.
That's smart.
But if you're keeping the majority of your wealth in cash because you're scared, your net worth is deteriorating before your eyes.
Sure, the cash won't "lose money." But your buying power will fall. And it will hurt.
As inflation creeps higher, a dollar today will buy less than a dollar two years from now.
There's also an opportunity cost to holding a pile of cash. Remember, the S&P 500 has reached record highs this year... anybody on the sidelines missed a tremendous opportunity to make money.
If you think you can time the market and get in when things look better, you're going to miss the big moves. Just look at 2009, when we were close to financial Armageddon and the S&P 500 advanced 24% for the year.
How many of your friends missed that major leg up?
Wealth-Building Tip #3: Don't Chase Yield - In today's low interest rate environment, it's tempting to invest in the highest-yielding stocks. But it's a recipe for disaster.
Wall Street isn't in the habit of giving money away. That means if a stock has a higher-than-average yield, it has a higher-than-average risk.
If you don't have a high risk tolerance, ditch any stock with a significantly greater-than-average yield. Don't chase yield.
If you can handle the additional risk, do your homework and know what you're getting into.
One of the best ways to feel confident about your dividend-paying stocks is to look at the company's payout ratio. It tells you what percentage of earnings or cash flow is paid to investors through dividends.
The payout ratio is the amount of the dividend paid divided by net income. Or, to get an even better picture of health, dividends paid divided by cash flow from operations.
If the resulting number is greater than 75% (except in the case of REITs and MLPs), stay away. It shows the company doesn't have enough cash in the event it has a bad year to maintain the dividend.
In other words, a 7% yield doesn't mean much if the stock craters by 20% when the company fails to pay the dividend a year or two down the road.
The bottom line is this: There will always be risk when investing. But by avoiding these three wealth-destroying moves, you can increase the chances your wealth will climb in the years ahead....
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