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August, 2011

A SIMPLIFIED GUIDE TO INVESTING IN U.S. STOCKS OR STOCK MUTUAL FUNDS
by LARRY

First, only invest in equities what you can afford to leave invested for at least five years.

Second, avoid selling at a loss when the markets are down. It is far better for your nest egg's health that you ignore the headlines and only check your portfolio about once a year or so than that you look frequently at how things are doing, then sell in a panic if the news looks ominous.

Third, invest half your funds that are allocated for U.S. stocks or stock mutual funds in the shares of safe, financially strong, profitable companies with relatively low price to sales ratios, and which have reasonably low debt to equity (for instance 0.66 or lower).



These will tend to have lower volatility while still offering growth that is generally ahead of inflation.

Here are four that meet these criteria now:

Relatively Safe, Financially Sound Companies

Company/ClassStock
Symbol
Recent
Price
DividendDividend
Payout
Berkshire Hathaway, Class B sharesBRK/B$72.380.00%NA
CVS Caremark Corp.CVS$34.381.50%0.17
Eaton Corp.ETN$41.543.20%0.37
Raytheon Co.RTN$41.364.20%0.28



For those who prefer to invest using mutual funds, one of these might be a good proxy for the above investment category:

Relatively Stable Company Mutual Funds

Mutual FundTicker
Symbol
Recent
Price
10-Year
Avg.
Annual
Return*
Toll-Free
Number
CGM FocusCGMFX$27.8610.18%1-800-345-4048
Yacktman FundYACKX$16.9511.40%1-800-525-8258
*through 7/31/11



Fourth, invest the balance of your money for U.S. stocks/stock mutual funds in shares of small-capitalization companies with reasonable value for their price. Since 1926, stocks of U.S. small-cap companies have averaged total returns of better than 12%, though they are somewhat more volatile as a rule than larger companies' shares.

To assure greater safety along with a satisfactory total return, I prefer companies with low: price to cash flow; price to book value; price to earnings; price to sales; and debt to equity.



Here are four that currently meet these criteria:

Small-Cap Companies

CompanyStock
Symbol
Recent
Price
DividendDividend
Payout
Brooks Automation, Inc.BRKS$8.573.30%NA
Cohu, Inc.COHU$10.542.10%0.20
Culp, Inc.CFI$7.930.00%NA
PC ConnectionPCCC$7.570.00%NA



Again, for those who like to invest in mutual funds, one of the following may fill the bill for this part of one's equity assets:

Low Priced and/or Small-Cap Mutual Funds

Mutual FundTicker
Symbol
Recent
Price
10-Year
Avg.
Annual
Return*
Toll-Free
Number
Heartland Value PlusHRVIX$27.1112.32%1-800-432-7856
Fidelity Low Priced Stock FundFLPSX$37.2610.05%1-800-544-6666
*through 7/31/11



Along with rebalancing, as appropriate, to restore one's chosen levels of reserves, bonds or bond mutual funds, and foreign assets, if after a period of significant market volatility, whether trending upward or downward, an annual review of your assets shows that one of the two U.S. equity categories is significantly higher (ten percent or more) than the other, sell off some of that category and use the proceeds to purchase more of the lower category U.S. stocks or stock mutual funds.

While it is just an option for easy application, one can overall keep 20% each of one's liquid assets respectively in money market or similar short-term reserves (a safe haven in case of a market meltdown, loss of one's job, etc.), intermediate term bonds or bond mutual fund shares, foreign assets/mutual funds, and the two above referenced U.S. stock/mutual fund categories. By periodically selling the higher portions of such an allotment of one's resources and buying more of the lower portions, one assures the basic rule of investing, to "buy low and sell high."

One's annual review and rebalancing (as appropriate) is also a good opportunity for analyzing which stocks or mutual funds to retain and which to replace. Are one's purchase criteria still applicable? If so, no need to make any changes.

If using mutual funds in taxable accounts, it is best not to buy new or additional shares shortly before major dividend or capital gain distributions, since they automatically increase the number of shares (which lowers the price for all of them), and yet one still owes taxes on the distributions as if one had had real gains.



DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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