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Investing In The Stock Market
The Smart Profits Report: Issue #457
Wednesday, September 19, 2007
Investing In The Stock Market: You Work Hard For Your Money, Now Make Sure It Works Hard For You
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research
“So what do you do for a living?”
“I’m a stock analyst.”
As soon as I answered the question, I immediately had that “uh-oh… here it comes” feeling. She’s going to want a stock pick, my thoughts on investing in the stock market, or my opinion on her favorite stocks. And considering the person in question was my chiropractor, who was working me over at the time, I’d have to choose my words carefully!
But her response surprised me. “I don’t know anything about that stuff,” she said. “I don’t even know what I own, nor do I care.” Yikes. Red flag #1.
I asked her what she does with her money. “Nothing really,” she answered. Red flag #2. I pressed her on whether she just puts her money in the bank, is saving for retirement, investing in the stock market, etc. She said that her brother-in-law “handles all that stuff since he seems to know what he’s doing.”
It’s a good thing I was lying down at the time, otherwise I’d have probably fallen over from the shock. Like it or not, money is one of the most critical things in life - and she’s making some big mistakes when it comes to deciding what to do with it. Are you doing the same?
Don’t Be Intimidated By The Stock Market… Just Get Smart
The exchange served as a good reminder. Just because investing is my bread and butter and the people I work with are very interested in their finances, I sometimes forget that the stock market intimidates some people to the point of inaction.
Sure, not everyone has the time or interest to research stocks, bonds, mutual funds and other asset classes. But everyone should find the time to make sure their money is working for them. My chiropractor works hard for her money - and it should be doing the same for her.
Here’s how to get smart with your money…
Hit The Money Trail Running With These Three Investing Tips
- Prepare A Plan Or Plan To Fail: If you’re a stock market rookie, or you don’t have the time, knowledge or inclination to research top-performing investments for yourself, that’s fine. But you should at least work with a financial professional to establish an investment or savings plan.
- Set Goals: If you don’t know what you’re working towards - i.e. retirement, college education, dream vacation home, etc. - you’ll never set targets or know how much you need to earn and how much risk you can afford to take. Aim for specific goals, set targets, and make sure your money has a purpose, otherwise you’ll be in the same spot tomorrow as you are today. You can always change your objectives and methods later on (after all, you still need to be as flexible in the markets as you are in life), but starting off down a path is critical.
- You Need Some D.I.Y (Do It Yourself): When my chiropractor said she trusted her brother-in-law to take care of her money for her, I was concerned. I’m sure he’s a stand-up guy, but if investors don’t read their statements, or have a clear understanding of what they’re invested in and why, that’s a recipe for disaster. In the best case, the investor is unlikely to reach their financial goals. And in the worst case, the person you trust might be uneducated, reckless, or unscrupulous and can take advantage of the disinterested account holder.
You don’t need to be able to read a company’s income statement to be a successful investor in the stock market. But you should understand why you invested in that small-cap international equity fund.
Make A Date With Your Money
In addition to setting actual targets for the amount of money you need/want to make and when, you should also set aside a regular time to review your progress.
- For example, you should read your financial statements (bank, savings, investments) at least every month.
- Once a quarter, do an overview of your overall finances to see where you stand and whether you should be investing/saving more or less.
- Then, once a year, conduct a thorough review. Pick the same time every year to go over your accounts, see whether your goals are the same as the year before, how close you are to reaching them, and what revisions you need to make.
I do this right after my birthday and come up with a battle plan for the year ahead.
And such diligence has served me well. I believe that we’re currently on target to reach our retirement goals, as well as paying for my kids’ college education. Of course, a nasty bear market could change that, but if that’s the case, I’ll reassess next year.
It’s OK to make changes more often in your trading account, but when it comes to long-term goals, I wouldn’t make radical changes more than once a year (unless of course there is a dramatic change in your life such as a birth, death, medical situation, etc).
Remember, nobody cares more about your money than you. It’s imperative to take an active role in the managing of that money, even if it’s just a supervisory one.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
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Today’s Smart Profits Action Center
- When forming your investment plan, always heed the core tips. First, make sure you spread your risk by having a diversified, balanced portfolio. You can diversify in several ways, too - by country, by sector, by asset class (i.e. stocks, bonds, etc.) Second, decide how much you want to invest - and never risk more than you can afford to lose. You can mitigate this risk by position sizing - allocating the same amount to each of your positions, so no one loser can kill your portfolio. Then make sure you use stop-losses. This is one of the best risk management strategies, because it ensures that if one of your positions declines, you stay disciplined by never taking a heavy loss.
- The Federal Reserve slashed the federal funds interest rate today by 0.5% to 4.75% - the bank’s first cut in four years. This was the relief the market craved - and investors promptly sent stocks flying higher. But imagine if you didn’t have to depend on external forces like this and could start every year with the certain knowledge that you’re going to collect 96 checks a year (8 per month) - like clockwork - no matter how well or how poorly the market is performing. It doesn’t involve anything complicated or risky - it’s actually extremely safe, lucrative and has the flexibility to succeed in all markets. And you can start this November. Click to continue on for more details.
Related Articles:
- Investing In The Stock Market: Three Factors That Could Buckle The Bulls
- Position Sizing Stocks: Are You Losing Money On This Popular Investment Strategy?
- Financial Risk Management: Know Your Risk Tolerance Before You Trade
- Stock Market Investing: 3 Things Investors Must Master To Improve Their Trading
