Do Your Homework Before Investing
When it comes to money and investing, doing it the right way is essential. Now, one person’s “right way” may not fit another’s, but every investor needs a game plan. So consider the rules below which apply whether you are a value investor, growth investor, active trader or just someone who believes in capitalism and wants a shot at building a retirement portfolio or college fund.
- Think before you dig into your pocket. First and always, do your homework—read, read and read. Consult a financial advisor to find options that work for your financial situation. Don’t rush into any investment, no matter how good it may sound or how many friends have already committed funds to it. Without exception, every investment has pros and cons. Know what they are.
- Know what you are buying. Peter Lynch, the legendary mutual fund advisor, once said he never put money in a company that produced a product or service he didn’t understand. He learned that from Warren Buffett. Both men have done quite well for themselves and investors. This doesn’t mean that, like Buffett, you should avoid anything too “technology oriented.” Your financial advisor can help you learn as much as you can about a company and its products before you invest.
- Don’t be afraid to go against the grain. If all your friends are excited about a particular investment, you also might consider buying it—but do your homework first. If it turns out that each bought it because another recommended it, you might want to consider the motivations of the original source.
- Monitor your investments regularly. You don’t need to rush home every evening and punch up your stocks or funds on the Internet. But, you should work with your financial advisor to carefully monitor each investment in your portfolio. Investments that do not perform in line with your expectations should get immediate attention.
- Admit you made a mistake. Don’t feel that every investment you make must turn out to be a winner. Your financial advisor can help you determine whether cutting your losses early on might save you more in the long run. Consider using stop orders at a predetermined price to limit losses and protect profits. This does wonders to reduce the emotional involvement in the often difficult decision to sell.
- Don’t be afraid. Go ahead and put money into an investment that has experienced a major price decline. But do so only after careful research and only after you and your advisor have found an investment thesis that makes sense to you. Keep in mind that many investments get beaten up for good reason.
- Take it with a grain of salt. Take all research and chatter about a stock with many grains of salt. Your financial advisor can help you learn to cut through the clutter and make better decisions more often.
- Ask questions—all the time. Never stop pursuing knowledge about the financial markets and investment strategies. When it comes to investing especially, knowledge truly is power. IBI