Defining a Long-Term Investment in the Stock Market

For some "long term" would mean holding a stock position over the weekend. For others, it may mean holding a security for at least 1 year for the purpose of declaring a long-term capital gain, thus saving on taxes.

The rigid definition of a long-term investment in the stock market would be holding a security for a minimum of 5 years, to as long as 30 years.

I'm going to tell you my definition of a long-term investment in a security by telling you a story. A true story!

My Mother worked as a teller in a small bank in Dover, New Jersey. The name of the bank was called The Dover Community Bank. While working at the bank (she eventually became a branch manager) she enrolled in the bank's dividend reinvestment plan, making purchases of the stock through pay-roll deductions from her paycheck. She continued purchasing the stock through the years, having the dividends from her shares in the bank reinvested into more shares every quarter. By the time she left the bank (in the early seventies) she had accumulated around 300 shares of The Dover Community Bank.

My Father, when he retired, had the dividends from those shares sent home ? to help ends meet. When my Dad passed away at age 80, my brother and I inherited over 7,600 shares of The Bank of New York, all originating from those 300 shares of what was once called The Dover Community Bank.

So, through this individual experience I have adopted my own opinion of what is called a long-term investment in a security. It is simply this ? securities should be purchased with the intent of providing dividend income to help ends meet during retirement, with the understanding that no one can successfully retire without financial freedom.

So every investment now in a security would be purchased with the intent of holding that security (and adding to it during the years) until the dividend income from that security is ample enough to ease the loss of income from retiring from my job. Now, I not only provide for myself during my retirement years, but will leave this earthly realm knowing that I will also be able to relieve some financial burdens for those I've left behind.

With this definite, concrete purpose for investing in mind, a definite, concrete plan would need to be created (and can be found in my book The Stockopoly Plan) to achieve this long-term investment goal. My Mother invested in only one stock and got lucky ? a considered plan would diversify.

If I am going to hold a security position forever, what criteria should I be looking for in that security? Certainly, dividend income ? that's a given! And since I never intend to sell the security, capital gains may not even be an issue (more on this later).

So then, what else? I would argue that a company that just pays a dividend isn't good enough. Instead, I will only purchase those companies that have a long history of raising their dividend every year. This will eliminate a whole bunch of risk. It would eliminate the possibility that the company is 'cooking their books;' after all, the money has to be there to pay the shareholder. And because this company has been raising their dividend every year for many years, it eliminates the risk of investing in a start-up company that may not even be around in a year or so.

Also, the rising dividend every year would help off-set the risk of inflation and the risk of a lower stock price during the year would actually accelerate my income from the security.

Since I would want my position in the stock to grow through the years, thus increasing my dividend income, all dividends would be reinvested into the stock, until retirement. A lower stock price, therefore, would purchase more shares, at a higher dividend yield and would simply accelerate my dividend income.

Now the question may arise, when would I want to sell a stock? Certainly not because a Merrill Lynch has downgraded the whole sector ? that's a blessing in disguise ? a temporary lower stock price just means a higher dividend yield, allowing my dividend to purchasing more shares.

The question of when to sell a stock puts me in the mind of a quote I once read by Jacobsen ? "Judgment is the one thing you cannot learn at college. You either have it or you don't have it." The time/reason to sell a stock varies. If there comes a time when you have so much money tied up in just one stock position that it's making you feel uncomfortable, sell some of it. If the company you purchased stopped raising its dividend you may want to lighten up and/or divert the funds you were putting into that security into one that is continuing its program of increasing their dividend every year.

A company may trim their dividend ? when and if this happens (and it does) my advice is not to be overly anxious to sell the stock. Find the reason why the company is trimming their dividend. It may be to reduce debt or for the possibility of acquisitions. The company's dividend yield may have been around 6 percent, and all their peers' dividend yields are around 4 percent. Certainly, do not add to your holdings in this company, but give management a chance to see how they handle the extra cash, since they appear to have better use for the money, other than to pay their shareholders. The resulting growth in that company may make up for the lower dividend yield and two or three years later you'll get a better perspective on whether to sell the company or not (or to continue adding more shares through new monies, or simply to allow the dividends to continue purchasing the stock).

For more excerpts from the book 'The Stockopoly Plan'
Visit: http://www.thestockopolyplan.com

You have permission to this article either electronically or in print as long as the author bylines are included, with a live link, and the article is not changed in any way (typos, excluded). Please provide a courtesy e-mail to charles@thestockopolyplan.com telling where the article was published. (word count 986)

Charles M. O'Melia is an individual investor with almost 40 years of experience and passion for the stock market. Author of the book 'The Stockopoly Plan - Investing for Retirement', published by American-Book Publishing.

---

Choosing An Investment Stock Broker

If you want one.And I don't recommend any broker with... Read More

What Can Model Airplanes Teach You About Trading?

I was devastated!I just couldn't believe it. I was 10... Read More

Prospering with Mutual Funds: How Anyone can ?Afford? an Investment Advisor

Recently I was invited to appear on a live CNNfn... Read More

Market Timing

Every broker and financial planner will tell you that you... Read More

Investing in the Stock Market - When To!

Is really not as important as to how you invest... Read More

Staying Sane While Wall Street Crashes

Everybody is riding the Wall Street Roller coaster. Even if... Read More

Overseas Investing: Going Against the Mainstream

TOO OFTEN, INVESTORS SIMPLY CHOOSE TO follow the crowd. This... Read More

Money, Insanity and Wall Street

Money: the most charged word in the planet. It means... Read More

China Syndrome

There has been great condemnation recently because China has been... Read More

Successful Trading ? Taking Profits - Part 1

So you're started trading, you bought some positions with your... Read More

Your Job

There are so many kinds of work that needs to... Read More

Political Investing

We have two candidates for president that have really different... Read More

Online Investing & Stock & Share Trading: 4 Reasons Why Most Online Investors & Traders Go Broke

Are you attracted to the idea of being in control... Read More

Paddle Your Canoe

At some time in your life you have been on... Read More

Smart Day Trading Strategies to Help You Make Money in the Stock Market

Stock trading can be a very profitable activity. You can... Read More

Oil Stocks As A Long Term Investment

The demand for world oil is increasing while world reserves... Read More

Psychology ? How to Reduce Negative Thoughts Relating to Trading?

The thinking process of the brain relating to the... Read More

How to Find Value in No Load Mutual Fund Investing

What are you thinking when it comes to your no... Read More

KISS Formula

There are formulas for just about everything, but it has... Read More

Stock Market Investing: Knowing When (and when not) to Sell

One of the greatest challenges of investing in stocks is... Read More

Will the Stock Market be Lower in October?

The stock market often closes a week in the middle... Read More

Understanding a Stocks PEG Ratio

A PEG ratio cannot be used alone but is a... Read More

Economists #2

Economists know more about how the fragments of society work... Read More

The Stock Market is a Roller Coaster: Prepare for the Ups and Downs

IT'S REMINISCENT OF THE OLD children's tale about an old... Read More

The Stock Market Doesnt Care if You are a Beginner?. Get Prepared to Succeed at Trading

Stock trading remains a very competitive field and the stock... Read More

Advisory Service for You?

It depends on your level of understanding of the market... Read More

Defining a Long-Term Investment in the Stock Market

For some "long term" would mean holding a stock position... Read More

Rebalance And Diversify

The stock market has not been very kind to your... Read More

Stock Market Volatility

In my opinion, due to the volatility of stock market... Read More

Stock Market Investing Odds

The greatest stock market myth is the idea that investing... Read More

Valuation

Every day I hear from the "experts" on CNBC-TV and... Read More

How (NOT) to Buy Mutual Funds

When it comes to mutual funds, there is a lot... Read More

Buy and Hold Investment Strategy

"Buy and hold" is one of the most heralded investment... Read More