Somebody smarter than myself once said that anybody could learn from their mistakes, but a wise man could learn from somebody else’s mistakes. In that spirit, I present some humble tips gleaned from experience and observation. Remember, my definition of “investment” is “spending money with the reasonable expectation of receiving more money in return at a later date.” So life insurance and lotto tickets are specifically not investments in my book.
Be honest with yourself about what you expect your investments to do. Have two exit plans: one for if all goes as expected; one for if things don’t go as expected. Write your goal and plans down before spending money if you have to. There’s no such thing as a “sure thing,” so you need to be prepared for the idea that the hot stock of the day might be going down. Or maybe there isn’t as much market for collectable action figures as you thought there would be. It is alright to cut your losses rather than following a bad investment down the drain.
Investments are not cuddly. You may dearly love your collection of dolls or teacups or what-have-you. That does not make them investments.
The key to investing in assets is realizing that it’s a good deal before everybody else does. The Motley Fool used to talk about finding good quality small capitalization stocks before fund managers and the rest of Wall Street. When institutional interest finally comes, it should cause the price of the stock to go up. Of course, the opposite is true too. When you accidentally overhear multiple people in multiple places talking about a particular, a reversal is likely coming. Everyone who wants the action is already in.
The trend really is your friend. While it is a bad idea to go chasing the latest hottest trend unless you have nerves of steel and are poised to get out of your investments at a moment’s notice, it is a good idea to notice where things are headed. You may never be an expert reading stock charts, but it doesn’t take much to figure out that if prices keep going down, they are likely to continue. Somebody has to be the guy who buys at the very bottom, but chances are it’s not you. At least wait until prices stop going down. The only asset this advice does not apply to is bonds. That’s because as the price of bonds go down, the effective interest rate you earn on them goes up.
Never buy something without knowing what it is going to cost. Never ever place a market order for a stock that is not trading at the moment. If a fast-talking salesdude tells you to act now without telling you exactly how much money it is going to cost, don’t walk away: run! “I have to have it and I don’t care what it costs” is fine when ordering lobster at market rate, but it’s no way to buy a house or a stock or much of anything else that costs more than you are apt to have in your wallet in cash.
If you are going to invest in stocks, learn to use stop and limit orders. Stop orders — aka stop-loss orders — are designed to keep you from losing money. If a stock drops below the price you set, it sells. Or if a stock rises to a price you set, you can buy. Limit orders work the other way around: a limit buy order says you will pay no more than your set price; a limit sell order means a stock you own will be sold when the price rises to the set price. Each is valuable.
Finally, ask yourself why. Sometimes an investment serves more than one purpose. For example, if you buy a house it is both the place you live and an asset. If you put money in an IRA you hope to make money as well as get a tax break. When you invest money, you should be able to say why you think it’s a good investment to people like your spouse or financial advisor. Now and then, you should revisit this answer to see if it’s still true.
In closing, an interview with Yukio Hattori. House of Representatives defeats spending cut measure showing both that decency is a family value and that Republican House Leadership can no longer force obedience. Two good reasons why the GDP seems so much better from the top than from where we are. And three times as many people believe in ESP than believe Dick Cheney is a good Vice President.