So you want to try your hand in the world of personal
finance without paying the fees associated with obtaining professional advice
from a broker. Let’s get started on a
couple pointers:
- Keep it simple – just like anything else you first start. Don’t get thrown into the deep end of the pool. Avoid options (puts/calls), futures and warrants. Although these investment vehicles may offer significant returns they also administer significant risks and are best left to the astute investor.
- Understand the marketplace is not perfect. Individual share prices are not properly valued today nor will they ever be in the future. Much of the share price of an individual stock is garnered by media hype and current market trends. This is no better exemplified by the fact that an individual share of a company may cost you $X in the morning and $Y in the afternoon all the while no new financial analysis or information has been made available to investors. A common example I use is that of Halloween candy. A bag of Halloween candy prior to October 31st might cost you $10 however on or after that date the same bag of candy can be purchased for $5. The bag of candy after October 31st is no different then it was leading up to Halloween and yet the market now dictates a significant decrease in its value. How does this translate to purchasing stocks? It means purchasing shares at $5 as opposed to $10. Sounds simple right? Navigate away from shares that have recently seen significant increases in price under the hopes it will continue to trend upwards. Purchase shares with high earnings per share as a percentage of their cost. By purchasing under-valued shares the opportunity to experience greater loss in the future has already been minimized if not removed altogether.
- Invest in what you know. If you know nothing about mining and what makes a mining company successful what is there to suggest you can decipher whether one represents a profitable investment. This isn’t to suggest you need a PhD in any or all of your investments but instead simply have an understanding of the industry in which you are investing. In doing so you are better equipped to monitor company fundamentals and dictate future profitability. Invest in companies with simple and well understood products.
- Mix it up but only a little. Warren Buffet himself once said that ‘diversification is protection against ignorance’ meaning that one diversifies only when they are not confident in their own investment strategy. The under-lying principal however is that the individual investor has sufficient expertise to concentrate in one specific strategy. Diversification diminishes both risk and reward. As a novice investor don’t place all your eggs in one basket. Don’t invest in only one company or one industry. Diversify your investments so as to minimize the risks associated with an industry segment’s overall failure - but don’t get carried away. As your investment savvy grows so too may your concentration of risk.
- Don’t bet the farm. Only invest in stocks what you can afford to lose. Take the time to develop a personal investment strategy and don't let current market trends dictate changes in your position.
