One pitfall that I take measures to avoid is "restlessness" as an investor. One of the hardest things to figure out (at least for me) is how to toggle the risk/reward landscape as I make my decisions. Namely, I must decide with each investment dollar whether I want to pursue a near-guaranteed 5-6% return or aim for a more ambitious long-term holding that holds the promise of 8-12% annual return potential. The strategy that I have employed is this: I make my investments in pairs. My objective as an investor is to buy the highest amount of future profits at the lowest price possible, on a risk-adjusted basis. One of the investments is generally tilted more in favor of "the highest amount of future profits", and the other is titled on finding something conservative that satisfies my self-imposed "risk-adjusted basis" demands.
For instance, the stock that I probably receive the most private correspondence questions on is Apple (NASDAQ:AAPL), especially with the stock's recent downfall in stock price over the past year. With the company trading at less than 10x earnings and offering a 2.50% dividend yield, some investors have inquired as to whether I have established a position. The answer is no because I cannot predict Apple's cash flows five years from now (the investment version of saying "it's not you, it's me"), but I can tell you how I would proceed if I did want to make an Apple investment and be at peace with the decision over the long-term.
Let's say that I was a Roth IRA investor looking to invest the maximum $5,500 this year. I would get in the habit of using each year as an opportunity to make roughly two equal investments (about $2,750 each). And what I would do next is this: pair an Apple investment with a company that has incredibly stable earnings, perhaps a bellwether utility like The Southern Company (NYSE:SO). The dividends and earnings only grow at Southern Company by 4-5% each year, but the appeal of the investment is the certainty: you're almost guaranteed to get that growth. For some investors, it is a source of considerable solace to know that those dividends that get reinvested year after year are going into a business that will always be there, and a longstanding electric company is a good place to make that bet (plus, as the economy continues to improve, it's possible that Southern may get more generous rate increases, thus increasing earnings at a rate higher than that 4-5% stated above).
In my personal life, I made my investment in BP (NYSE:BP) at the same time that I made my investment in Johnson & Johnson (NYSE:JNJ). I bought BP with the promise of strong income growth that would be accompanied by capital gains: the 5% starting dividend has been nice (and well covered by earnings), and if BP management is correct that real earnings power is around $7 per share in 2015-2017, then shares are a steal today. However, because I had been concerned by the $38 billion asset divestiture and the ongoing litigation from the oil spill, I classified the investment as my pursuit of higher future profits.
For Johnson & Johnson, I bought the stock with the belief that the company is a virtual money-printing machine with unassailable patents, trademarks, and dominant market share positions that makes money in dozens of countries. Despite the string of recalls, lawsuits, and turmoil that has threatened the company's health, the firm has managed to increase cash flow per share during every year of my adult life. I appreciate that fact. The underlying business is so strong that it continues to grow in spite of the parade of negative headlines that has confronted the company over the past 2-4 years. That's why Johnson & Johnson satisfies the "risk-adjusted" portion of my investment demands. In fact, Johnson & Johnson is my largest personal holding.
Making my investments in pairs has served me well so far because it allows me to make two investments with different risk profiles that blend well together to meet my goal of acquiring the most future profits at the lowest possible price on a risk-adjusted basis. This approach is useful for avoiding the agony that can often accompany an investor wondering whether capital preservation or capital growth should be the primary objective. By making investments in pairs, you can choose one that primarily protects wealth, and another that is aimed at accumulating wealth. Together, it can often blend to form an investment strategy that can give you satisfaction as you put your portfolio together over time.