Thursday, May 7, 2009

Happy Mistake Free Investing

"Learn from the mistakes of others. You can't live long enough to make them all yourself." - Eleanor Roosevelt.

Some mistakes are more painful than others. Followings are investing mistakes that you do not want to make and are avoidable.

#1 Don't Let Poor Asset Allocation Make You Poor

Before trying to figure out if the latest share tip is worthy of your investment dollars, you need a plan. How much should you put into shares? How much into bonds? How much should just be in an emergency savings account fund?
Four rules of thumb are:

Rule 1: If you need the money in the next year, it should be in a high interest savings account.

Rule 2: If you need the money in the next one to five (or even seven) years, choose safe, income-producing investments such as gilts or bonds.

Rule 3: Any money you don't need for more than seven years is a candidate for the stock market.

Rule 4: Always own shares.

Remember to be honest with yourself about how risk-tolerant you are. When times are good, it's easy to take too many risks with your portfolio, and vice versa.

#2 Don't Invest In Anything You Don't Understand

Buying shares in a company you don't understand is a bad move. If studying individual companies isn't your thing, there is no shame in buying and holding an index tracking fund.

Don't trust an "expert" just because they use terminology you don't understand.
If you have no clue what the risk is in the risk-reward balancing act, you're better off putting your money elsewhere. Yeah, it's possible to take an insane risk and make your fortune in a year. It's also possible to win the lottery … but I wouldn't bet my retirement on it.

#3 Never Buy On Margin

Just don't do it. Using margin (i.e., borrowing money from your broker to buy shares) is a very dangerous game. You are not in control of your own destiny – using margin transfers your financial destiny to the whims of the stock market and of your broker.

Don't Hate … Participate!

Here's a bonus tip: don't procrastinate. It's never too late to start taking control of your financial future … but it's never too early, either.

Happy, mistake–free, investing.

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