The Best Way To Keep From Making Foolish Investing Mistakes

Smart folks occasionally make silly mistakes with regards to investing. Part of the reason for this, I guess, is that a lot of people do not have the time to learn what they need to know to make good decisions.

Do not Forget to Diversify

The standard 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 have to diversify.

To make money on the stock market, you’ll 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 several upper-division and graduate finance textbooks explain.)

Be Patient

It is important for investors to have patience. There will be many bad years. Many times, one lousy year is followed by another bad year. But with time, the great years outnumber the bad.

They compensate for the awful years too. Patient investors who remain in the market in both the good and bad years nearly always do better than people that try to follow every fad or buy last year’s hot stock.

Invest Regularly

You might already know about dollar-average investing. Instead of purchasing a set number of stocks at regular intervals, you buy a regular dollar amount, such as $100. When the share price is $10, you purchase 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 need to dollar-average every stock. In other words, if you are buying stock in IBM, you have to purchase a set dollar amount of IBM stock each month, every quarter, or whatever.

Do not Ignore Investment Expenses

Investment expenses can add up rather quickly. Small differences in expense ratios, pricey investment newsletter subscriptions, internet financial services (such as Quicken Quotes!), and income taxes can very easily subtract tens of thousands of dollars from your net worth over a lifetime of investing.

Investment expenses can add up to really big numbers when you understand that you simply could have invested the money and earned interest and dividends for years.

Do not 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 a person tells you that he has a sure-thing investment or investment strategy that pays, say, 15 percent, don’t believe it. And, for Pete’s sake, do not buy investments on a shell company or investment assistance from that person.

Don’t Get Fancy

For years now, I’ve made the better part of my living by analyzing complex investments. Nevertheless, I believe 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 simple investments, ask an investment professional about merge companies and financial mergers.

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