Investing must be systematic and patient
Avoid Panic
If you had panicked during the great recession of 2008 and pulled all your money out after the 30% or so fall in stock values, you would have missed the stock recovery since.
Don’t panic. Remember that investing in stocks is a long-term proposition and there will be bad times as well as good. Stay calm and even seek out buying opportunities in solid companies when all around you are selling out of panic.
Dollar Cost Averaging
Another key principle for investment is dollar-cost averaging. This means that you purchase stocks periodically e.g., every month, so that you avoid buying stocks at their peak.
If you are a purchase stocks as part of your 401K or 403B, this will be done automatically for you every month with each paycheck deduction (and hopefully, company match).
However, if you trade in stocks from home, then you have to instill the habit and avoid the temptation of investing all of your inheritance on the day you receive it.
Be Realistic About How Much Time You Have
Here’s the rub regarding investing in stocks. To invest regularly in individual stocks, you need a lot of time.
So for the day traders and serious stock investors, factor in the cost of your time and don’t think you’ll formulate a winning strategy based on a few “stock tips” from friends.
You will need to sign up with a trading service like Vanguard, Scottrade, or E-Trade, but on the positive side, all of them bundle tools to aid stock and company research.
If you have a day job like most people do and lack the time to conduct extensive research into stocks, you may want to invest in mutual funds instead.
With a mutual fund, you leave individual stock decisions to the stock manager, and you, together with thousands of other, buy a slice of his or her managed stock portfolio.
Even though you must still research individual funds, the task is much easier for the average investor. Some popular classes of mutual funds include:
- Index funds: these invest across all stocks in the market or a sector of it to broaden risk and generally rise and fall with the overall stock market index.
- Target-Date Funds: These funds are based on a target date – typically your retirement date and get more conservative as that date approaches.
For 401K programs, many employers actually pre-filter choices and present employees with a smaller (and hopefully, leading) set of mutual fund choices.
Cut Your Losses with Underperforming Stocks
If a stock declines by a set amount, sell it. Don’t wait in hope to “get even” and recover you lost money. Don’t throw good money after bad either. Set a selling criterion and follow it.
Also, the converse is true. Hold your winners, but remember to take money off the table if winning stocks do spectacularly well.
Monitor and keep up with your investments. No stock is safe forever. Today’s good stock can go south when a new CEO steps in. You should avoid the old “buy and hold forever” even for the bluest of blue chip stock. The world is now too dynamic and fast changing for that.
As always, consult your personal financial adviser before investing in the stock market or any other investment.
