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For Most Investment Decisions, Think 3-5 Years Out

10 November 2008 No Comment

Do you have a process for selecting investments, specifically individual stocks? What do you look for? Do you look for technical or fundamental reasons for buying a stock? Today, I’m going to talk about an investment strategy I like to call the 3-5 year outlook.

Fundamentals and 3-5 Year Outlook

I like to find stocks that have fantastic fundamentals that support a significantly higher share price 3-5 years from now. Why 3-5 years? Because emotions, bubbles and trading trends can dominate a short term share price, meaning it could take some time for quality fundamentals to force a higher share price and a return on your money. Also, fundamentals can change; therefore, a re-analysis of those fundamentals should be performed after 3-5 years and hopefully after a nice return on your money.

I’m not a firm believer in the buy and hold forever strategy, because like I just said, fundamentals can change. Consider tech companies such as Apple (AAPL). I believe they have some of the strongest fundamentals around right now. However, technology can change fast and in 10 years, Apple might not have the standing it does today. Ask Motorola investors how quickly “fundamentals” change. Because companies can very well lose their competitive advantages, fundamentals that support a nice return are not permanent. Therefore, 3-5 years is my recommended time span.

Lastly, your return on a 3-5 year investment can vary greatly depending on your entry point which brings me to my next point.

Entry Point

Your entry point on a 3-5 year position is crucial. It can severely impact your return. In fact, a 3-5 year investment should only occur when you are confident you are at a decent entry point. It is much harder to find a entry point when the market is at an all time high than, say, in today’s current environment.

A great approach is to find positions that have fundamentals that support high returns over 3-5 years that have low entry points due to overall market conditions. Two of my favorite 3-5 year investments right now are Apple and Oil (i.e. DIG ETF).

Exit Strategy

Since these are 3-5 year investments, you should have an exit strategy. You should always have an exit strategy unless you are planning to hold a high yield dividend play indefinitely.

Determine what you think a nice return will be and commit yourself to exit the position when you reach this return. If you want to consider holding the position past your committed return, you need a full re-examination of the fundamentals. If you can’t commit more money to the position, you should probably sell the position and ring the register. Remember, paper gains don’t mean anything. Don’t be afraid to ring the register.

Do you have any potential investments out there that look like great returns 3-5 years out?  What is your expected return (i.e. when do you plan to exit your position)?

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