Invest What You Can Lose

Everyone has heard the stories about a little old lady living on the interest of her savings that gets convinced to buy a stock that will go through the roof. Of course, in the story this little old lady invests her life savings and loses it all. The moral of the story is to only invest what you can afford to lose–nothing more. If you put everything on the line, you better be willing to lose it all. This isn’t to say that you will, but you need to plan for contingencies. When looking to create a stock portfolio, make sure you are keeping 6 to 12 months worth of expenses in a liquid savings account that you can access in emergencies. This should give you enough to ride out any down markets in your stock portfolio and not panic.

Types of Stocks

Stocks vary in risk, cost and industry. There are literally thousands of stocks to choose from worldwide. This can make choosing which ones to buy a bit tricky. The first thing you need to do when looking for stocks is to determine how comfortable you are with watching your money fluctuate. Conservative stocks tend to fluctuate less than more aggressive stocks. Large companies are considered conservative while small companies are generally considered more aggressive. International stocks are considered more aggressive regardless of size because of currency exchanges and potential political stresses.

Finding Stocks

If you are looking for suggestions for stocks and don’t know where to begin, start by looking around your home. The company that makes your toothpaste, your favorite movies or your dog’s food are great candidates for stock purchases. Other ways to find stocks is to look at mutual fund prospectuses and review the top holdings of the company. This may illuminate smaller companies that fund managers have a lot of confidence in. You can also follow these major fund managers to see when they are selling stocks as well, but realize that by the time they sell a large block, the stock will decline in value and you will not be as successful as the fund itself.

Diversity

Don’t be the little old lady putting all your money in one stock. Even a conservative portfolio should have at least five conservative stocks, preferably in different industries. A conservative portfolio can also have a small percentage in moderate to aggressive holdings. Limiting this limits the possible downside of your portfolio while giving you opportunity for additional growth. If you are seeking a more aggressive portfolio, make sure you have at least 30 percent of your portfolio in conservative equities to balance the good years with the bad.

When to Sell

Most financial advisors recommend holding a stock until either you simply need the money or the company has fundamental changes that may adversely affect its growth. This is the philosophy of Warren Buffett–arguably one of the greatest investors of all time.

Fundamental changes in a company may include extreme situations such as filing for bankruptcy or undergoing a restructuring. It may be a major lawsuit against the company for a defective product. But fundamentals may change in a company in a less dramatic way, such as several quarters in a row with unexplained losses or losing market share because of competition. If a stock drops 25 percent of the purchase price you paid, you need to make a decision about whether or not the fundamentals changed or market conditions are adverse. If it’s the market, consider buying more. If it isn’t the market, it may be time to consider selling.

Of course, if you are looking to do day or trend trading, you will be looking for specific benchmarks that you are determining to be your sell cue. Frequent trading is not recommended for the average investor.