How to Avoid Stocks that can destroy your Retirement Funds.

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by: David Vick
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Date: Mon, 20 Dec 2010 Time: 1:15 AM
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Losing money hurts all investors however if you buy stocks that plummet in value and you are close to retirement age or in retirement the results can be even more devastating as often you are unable to make the money back lost by the stock. When buying stocks for a retirement fund investors need to avoid the medicore companies that lose value and buy only the best quality stocks that increase in value.

The most important item is to check earnings. You want to pick a stock that shows increasing and profitable earnings over the last 10 years or as a minimum the stock has had profitable and increasing earnings over the last five years. This data listed as earnings per share or (EPS) can be found on many finance sites on the internet or on your broker's website. Obtain the yearly data for earnings and eliminate any stock that shows a loss in any of the five years. Second look for earnings that are increasing over the last five years. If EPS has been decreasing over the last five years the business is getting less profitable and ultimately the stock price will go down.

The next item to look at is the debt of the company. Look for a company with a debt to equity (D/E) ratio of 0.5 or less. This data can be found on any broker site or many finance sites on the internet. If the debt to equity ratio is under 0.5 for every dollar of debt there should be at least two dollars of net assets. A lot of companies boost their earnings by borrowing money to expand their business. When there is a slowdown in the economy companies with huge debt are often the most vulnerable as they are unable to meet interest payment. This can cause the stock to go into bankruptcy or post massive losses that cause the stock value to crash. Sometimes there can be a just be a slowdown in that particularly industry but not the economy as a whole that causes a company with high debts have its stock price crash.

Unless you spend a lot of time studying the stock market and follow it daily avoid stocks with a market capitalization under 200 million. Stocks under 200m market cap can be highly volatile and subject to dramatic swings in value. All great companies stated out small and these stocks can often have very high returns because they can grow their business at much faster rates than larger companies. Many companies under 200 million market cap are companies like small drug companies developing drugs that are years away from being released on the market if ever or small mining and oil companies with no proven resources. If you follow the five year profit rule many of these companies will be eliminated simply because they haven't had five years of profits because they are often newly listed companies. Buying stocks in these micro companies is more suitable for an aggressive investor that can spend more time than the average investor researching the companies involved and avoiding the many companies in this range that remain mediocre companies with poor stock prices.

When buying the stocks for a retirement fund or any fund you are buying a share in a business. If the business is unable to show increasing earnings over the last five years it is not one of the best stocks that will increase in value. If a stock has high debt it is vulnerable to downturns in the economy that can cause the stock value to crash. Investing in stocks should not be like gambling but involves research to find the best stocks that will increase in value.

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moneystockstycoons.com is a website about investing and the worlds financial markets. The aim of the moneystockstycoons is to produce financial information that can help the average investor enjoy higher investment returns.

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