Intelligent folks sometimes make silly mistakes in terms of investing. Part of the reason for this, I guess, is that most 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 need to diversify.
To make money on the stock market, you'll need around 15 to 20 stocks in a variety of industries. (I didn't just make up these figures; the 15 to 20 range comes from a statistical calculation that many upper-division and graduate finance textbooks explain.)
Have Patience
It is important for investors to have patience. There are going to be many bad years. Many times, one lousy year is followed by another bad year. But over time, the great years outnumber the bad.
They compensate for the bad years too. Patient investors who stay in the market in both the good and bad years practically always do better than people who try to follow every fad or invest in last year's hot stock.
Invest Regularly
You might already know about dollar-average investing. As opposed to purchasing a set number of shares at regular intervals, you buy a regular dollar amount, such as $100. If 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 purchase twenty shares.
To make dollar-average investing work with individual stocks, you might want to dollar-average every single stock. In other words, if you are buying stock in IBM, you have to buy a set dollar amount of IBM stock each month, every quarter, or whatever.
Don't Ignore Investment Expenses
Investment expenses can add up quickly. Small differences in expense ratios, expensive investment newsletter subscriptions, internet financial services (such as Quicken Quotes!), and income taxes can 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 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 with the average annual returns of the stock market.
If an individual 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 advice from that person.
Do Not Get Fancy
For many years now, I've made the better part of my living by analyzing complicated investments. Nevertheless, I think that it makes most sense for investors to stick with very simple investments: mutual funds, individual stocks, government and corporate bonds, and so on.
To add to these basic investments, ask an investment professional about merge companies and financial mergers.
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