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.

---

Catnip of the Stock Market

I have watched my cat play with a bag of... Read More

This Market Is Different

All of the talking heads have been telling us that... Read More

The POWER of a Proven Stock Investment Plan

When you invest in the stock market for ever-increasing cash... Read More

Market Experience of a Naïve Stock Operator

Sometime in the third quarter of 1997, someone told me... Read More

How Eating Bitumen Made Me a Better Trader

Trading is a fascinating activity.There are so many layers to... Read More

Inertia

One of the basic laws of physics is that a... Read More

What is the Most Important Indicator of All?

Most stock market traders have a favorite technical indicator.The one... Read More

Can?t Stand The Heat

It seems that every day I turn on the TV... Read More

What To Buy Now

I am sure that if you have a brokerage account... Read More

Buy Low - Sell High

Now where have I heard that before? I know. It... Read More

Understanding Stock Market Indexes

A stock market index is a statistical measure of changes... Read More

Dollar Cost Averaging

Dollar cost averaging is one of the most popular ideas... Read More

Protectionism

First let's see what protectionism is. According to Mr. Webster... Read More

How to Short Stocks? How to Make Money when Your Stocks Go Down by Shorting

The stock market can present you with a lot of... Read More

Investment Lawyers and Trash Stocks

The trash business in its efforts to cook their books... Read More

Hedge Funds

You read and hear a lot about hedge funds. Unfortunately,... Read More

Living Trust Investing: Income Considerations when the Grantor Dies

A common problem I often see when working with living... Read More

What is a Trading Plan ? and Why You Need One?

How do you make money without picking tops and bottoms?I... Read More

Struggling Stocks, Booming Commodities

04/28/2005NASDAQ dropped -12.5% year to date in 2005. S&P500 index... Read More

Forces that Move Stock Prices

Among the largest forces that affect stock prices are inflation,... Read More

One Way Street

Ever turn down a street, get half way and suddenly... Read More

Analysts - Do They Really Know The Stock Market?

When you become interested in a stock or mutual fund... Read More

3 Components Needed for Beating the Market

Time to look back2004 is over, now we are in... Read More

Time Out

Are you paying any attention to your retirement savings? Do... Read More

Is the Stock Market for You?

Many people would like to diversify their portfolios to expand... Read More

Money, Insanity and Wall Street

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

Frog In The Pot

You remember the story about the frog that was put... Read More

Investment Capital Gains

Have you bought any mutual funds this year or late... Read More

Index Fund Trading Using Technical Analysis and Swing Trading Strategies

Index Fund Trading can be one of the most profitable...or... Read More

Mutual Fund Honor Roll ? Buy High, Sell Low by Chasing Performance

Buy high and sell low -- It's not a typo.Millions... Read More

The Top 10 Reasons to Invest in Mutual Funds

Everyone who follows the financial news has heard of mutual... Read More

Planning Your Dive and Diving Your Plan ? Trading!

A colleague of mine just returned from a scuba diving... Read More

Lifestyle Funds Provide Greater Security?

With the stock market stubbornly refusing to settle down and... Read More