An individual investor may choose to have a brokerage or wealth management firm manage his investments, or he may decide to make his own investment decisions. Two trends have led more and more investors to maintain their own portfolios, both driven by the Internet. First, investment firms began to offer online trading accounts with discounted commissions on stock trades. Second, a wealth of information and advice about investing is now available online to help the small investor make more confident investment decisions.
1. Educate yourself about investment strategies, market trends and the growth prospects for individual companies. Obtain your investing advice from more than one source. Read trusted publications such as "Investor's Business Daily," "Barron's," or "The Wall Street Journal."
2. Assess your risk tolerance. Stocks are a riskier class of investments than bonds or savings accounts. Consider the possibility you can lose a portion of your investment -- your hard earned dollars -- by investing in stocks. If you are risk averse, select stocks of larger, more stable companies with consistently rising earnings. Avoid speculative stocks that may have higher potential returns but are also much more volatile.
3. Develop your own disciplined investment strategy. Try dollar-cost averaging -- taking a fixed amount of money out of your savings account and putting it into stocks at pre-set intervals, such as every four months. This strategy allows you to purchase more shares when the market declines and gets you in the habit of saving and investing regularly.
4. Focus on portfolio diversification. Invest in a group of stocks in different industries -- a half dozen or more. If one or several companies in your portfolio has disappointing earnings and declines in value, the others in the portfolio may increase in value so you have an overall positive return.
5. Avoid getting too caught up in market swings, either upside or downside. Don't jump into the market when investor sentiment is extremely positive, or impulsively sell when short-term oriented investors are doing so. Set a goal of accumulating wealth over the long term. Choose a time horizon of five, ten or even twenty years depending on what age you start your stock investing program.
- Investing for the long-term does not mean buying stocks and forgetting about them. Review the performance of your portfolio at least semi-annually to see if the business fundamentals of each company remain strong. If one of the companies in your portfolio is losing market share due to factors such as increased competition, consider replacing that stock with one that has better near-term prospects.
- Downturns in the stock market can be sudden, violent, and from an individual small investor's standpoint, unpredictable. Make sure you keep a certain portion of your funds in cash or equivalents such as money market funds in case you need funds for an unexpected expense or emergency. You don't want to be in the position of having to sell stocks when they are extremely low in order to raise the cash you need.
- "Getting Started in Stocks"; Alvin D. Hall; 1997
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