So far this week, we’ve covered a variety of ways to invest, from target date funds to actively managed mutual funds. But through all these methods, you may have noticed one common trait: you haven’t been completely in control. You’ve been relying on indexes or professional investors to choose your investments for you. But what if you, like Delilah, want to take the reins on your own finances?
“I LOVE investing! I like to do research, educate myself, and study financial literature. But it seems like so many places just want me to invest in mutual funds, and index funds at that. What can I do to take control of my investing?”
Well, Delilah, you’re in luck, because today is all about do it yourself style investments. Let’s start with most commonly cited type of individual investment…
Stocks
Before we get started with investing in individual stocks, let’s go through the standard warning: stocks are risky. Unlike mutual funds that invest in tens, hundreds, or even thousands of companies, stock from a particular company is tied to the good (or bad) fortunes of that company. Even if the industry as a whole is doing well, even if the economy is doing fine, problems with the company could cause it to go bankrupt, leaving your stock worthless.
As a result, when investing in individual stocks, you’ll need to keep a few things in mind when stock investing. First, diversification is a must; no matter how much you believe in a particular company, putting all your eggs in their basket is just foolish. Be willing to invest in several companies (five to ten, at minimum) to ensure that problems in one aren’t enough to completely sink your fortunes. Second, be willing to do plenty of research if you are holding individual stocks. No less an authority than Jim Cramer recommends one hour per stock per week; if you can’t (or won’t) devote that much time to researching your holdings, it’s better to stick with mutual funds in your portfolio. Third, chances are that you won’t be able to get stocks to fill your entire portfolio; even if you can find enough domestic stocks to fill your needs, there are still foreign holdings to consider (to say nothing of bonds). Even if you invest in individual stocks, keeping some mutual funds in your portfolio to fill the holes is a good idea.
Alright, enough of the warnings and cautions. The most common way to invest in stocks (rather than trading, which falls more into the realm of speculation) is to buy in small amounts regularly, slowly building up your holdings. This is the standard ‘buy and hold’ approach, where you buy a stock with the intention of holding it, potentially forever. In this approach, be sure to carefully research the stock. There are plenty of resources available to you to research potential stocks in which to invest (did I mention my fondness for Morningstar yet?). Be sure to adjust your asset allocation to reflect the added stocks (you don’t want to be overweighed in a particular area should a bubble burst on you).
Follow these tips, and you should be able to add individual stocks to your asset allocation without a problem. Good luck, and rock on would-be investor!
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