Intelligent folks sometimes make silly mistakes in terms of investing. Part of the reason for this, I guess, is the fact that many people do not have the time to learn what they need to know to make good decisions.
Don?t Forget to Diversify
The average stock market return is 10 percent or so, but to earn 10 percent you must own a broad range of stocks. In other words, you must diversify.
To make money on the stock market, you need around 15 to 20 stocks in a variety of industries. (I did not just make up these figures; the 15 to 20 range comes from a statistical calculation that many upper-division and graduate finance textbooks explain.)
Have Patience
It?s important for investors to have patience. There are going to be many bad years. Many times, one awful year is followed by another bad year. But over time, the great years outnumber the bad.
They compensate for the lousy years too. Patient investors who stay in the market in both the good and bad years virtually always do better than individuals who try to follow every fad or invest in last year?s hot stock.
Invest Regularly
You may already know about dollar-average investing. Rather than purchasing a set number of stocks at regular intervals, you purchase a regular dollar amount, such as $100. If the share price is $10, you buy ten shares. If the share price is $20, you acquire five shares. If the share price is $5, you acquire twenty shares.
To make dollar-average investing work with individual stocks, you have to dollar-average each stock. In other words, if you?re buying stock in IBM, you need to invest in a set dollar amount of IBM stock each and every month, every quarter, or whatever.
Don?t Ignore Investment Expenses
Investment expenses can add up quickly. Small differences in expense ratios, costly investment newsletter subscriptions, online financial services (including Quicken Quotes!), and income taxes can quickly subtract hundreds of thousands of dollars from your net worth over a lifetime of investing.
Investment expenses may add up to really big numbers when you understand that you could have invested the funds and earned interest and dividends for years.
Don?t Get Greedy
People today make all sorts of foolish investment choices when they get greedy and pursue returns that are out of line using the average annual returns of the stock market.
If someone tells you that he has a sure-thing investment or investment technique that pays, say, 15 percent, do not believe it. And, for Pete?s sake, don?t buy investments on a shell company or investment assistance from that individual.
Don?t Get Fancy
For many years now, I?ve made the better part of my living by analyzing complex investments. Nevertheless, I think that it makes most sense for investors to stick with basic investments: mutual funds, individual stocks, government and corporate bonds, and so on.
To add to these basic investments, ask an investment professional about merge companies and financial mergers.
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