4

I want to start rolling rental income into the stock market more. I already max my company 401(k) so I don't mind something that isn't tax deferred.

Up to this point I have been saving $5k and then buying a mutual fund. Then leaving it forever. Rinse and repeat. I tend to prefer high dividend mutual funds that autoreinvest with no fee.

I also want to get into some companies that I know are doing well like Amazon for instance. I can't see a world where they don't exist so it seems like a good buy at the moment.

That all said, if I am going to shift to stocks that I manage I want to know when I should take my earnings, or if I should just leave it.

Is there a target return that's accepted as good? I assumed 8% (plus transaction fees). My reasoning though is pretty arbitrary. Can anyone provide any guidelines on setting your return target?

Also is $5k the right amount? Should I commit less per seed? I do 3 purchases a year at best.

  • 2
    Picking stocks isn't a part time hobby - would suggest committing to learning or just stick to ETFs and Mutual Funds. As for the min. to invest...I would say no less than 5k but 10k blocks is fine. If you are paying 8.95$ a trade and spend 1000$ a block you need to make .9% to break-even out the gate (not including the fee to sell...so 1.79%) but if you invest in 10000$ blocks you only need to make .09% ... large difference (x2 = .18%). But then you have to factor our how much the market is going to move during the time it takes you to save the difference between..... lots of options ;) – Ross Oct 19 '15 at 18:31
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    Picking stocks absolutely can be a part time hobby and a fun one if you can find other people that are interested in it too. However like most hobbies, on average it ends up costing you a decent amount and most people never make that much off of it. – rhaskett Oct 19 '15 at 23:59
  • That sounds like a dangerous opinion and seeing you are a CFA I am surprised to hear that view. – Ross Oct 20 '15 at 16:44
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If your question is truly just

What is good growth? Is there a target return that's accepted as good? I assumed 8% (plus transaction fees).

Then I'd have to point out that the S&P has offered a CAGR of 9.77% since 1900. You can buy an S&P ETF for .05%/yr expense. If your goal is to lag the S&P by 1.7%/yr over the long term, you can use a 85/15 mix of S&P and cash, sleep well at night, and avoid wasting any time picking stocks.

1

In One Up on Wall Street, Peter Lynch suggested that there are six major aspects to choosing growth stocks:

  • The Price-Earnings-Growth (PEG) ratio. In other words, the higher the P-E ratio, the higher the growth rate that is required to justify it.
  • Whether the growth rate is accelerating or decelerating. (Decelerating growth rates often result in declining stock prices, even while the earnings are still growing. Furthermore, the declines can be sudden.)
  • How close the company is to saturating its market. American retail and restaurant companies have easily estimated potential numbers of profitable locations. When they get to about 1/2 of this size, their stocks usually stop doing well.
  • The "story" that is being told on Wall Street about the company's strategy and prospects. Can you explain why the company is a good investment in two sentences? Is the story true? Is the story changing for the better, or for worse?
  • Do you understand what the company does?
  • Is the company a roll-up? Lynch liked investing in roll-ups, but he made a point of selling before the company ran out of companies to buy.
  • While useful information, it doesn't answer the poster's question, "What is a “good” target return for stock purchases that I could use to determine whether to stay in that investment?" – blm Oct 19 '15 at 21:57
  • @blm -- That was not the poster's question. You can confirm this in the edit history of the original post. The current title is different from when I answered the question, and is different from the original poster's intent. – Jasper Oct 19 '15 at 22:09
  • It may not have been the title of the post, but that and having some tags added are the only things that have changed, specifically, the last two paragraphs haven't changed, and they're the only ones with questions, none of which your answer answers. – blm Oct 19 '15 at 22:11
  • @blm -- The original poster asked for "guidelines" for buying and selling growth stocks, based on their growth rates. Lynch's advice is worth reading, but might need some adjustment (interest rates, P-E ratios, and definitions of non-operating earnings have changed in the last 25 years). His advice specifically addresses company growth rates. I assume readers can convert a desirable PEG ratio to a desirable growth rate (given the PE ratio). The other pieces of advice indicate when a growth stock is about to stop being a growth stock. – Jasper Oct 19 '15 at 22:25
  • I voted this answer up. The question, as it stands, is ambiguous. If it's truly "what percent gain do I target," it could have been asked in fewer than 6 paragraphs. Jasper doesn't answer the headline question, but does address the intent of much of the text. – JTP - Apologise to Monica Oct 20 '15 at 0:11
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The first issue is if the stock has returned 8% since you purchased it that could be either very good (8% in two days) or very bad (8% over 20 years). Even just measured over the past year it could be relatively very good (up 8% and the market is down 5%) or very bad (up 8% and the market is up 16%).

Either way, the good rule of thumb is that you shouldn't choose your positions using the returns of the stock in the past, but only on your view of the future returns of the stock. For instance, if the stock has gone up 8% in two months, but you think it has another 8% to go in the next two months you probably shouldn't take your earnings.

As for the $5k, at first glance that is not an unreasonable amount. If you use a discount broker the fees shouldn't be so large that you will eat up any return on a $5k amount. Also, from what you describe it is not such a large amount that mistakes will put your retirement in danger.

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There isn't a single hard and fast return to expect. Securities, like all things in a free market, compete for your money. As the Fed sets the tone for the market with their overnight Fed funds rate, you might want to use a multiple of the 'benchmark' 10-year T-note yeald. So let's suppose that a good multiple is four. The current yeald on the 10-year T-note is hovering around two. That would give a target yeald of eight.

http://stockcharts.com/h-sc/ui?s=%24UST10Y&p=W&b=5&g=0&id=p47115669808

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