There is an exception to every rule — even some of our favorite investing maxims.
RULE: When it comes to investing in stocks, buy what you know.
Looking for attractive stocks using your own experiences makes sense — if the stock truly is attractive.
WHEN TO BREAK IT: Don’t be swayed into investing in a company simply because you believe in its product. “There can be a difference between a good product and a good stock,” says Charles Rotblut, vice president of the American Association of Individual Investors. For example, you may spend hours a day on Twitter, but the stock (symbol TWTR) has been a terrible performer.
If you start your stock-picking by looking at a company you know and like, you’ll still need to do basic research on it, particularly on revenues and earnings trends. To find this information, check the company’s annual report online. Also, read up on the industry and the company’s competitors to see how its long-term prospects stack up against those of its peers. Or if research isn’t your thing, consider a broad-based market index fund, such as Schwab U.S. Broad Market ETF (SCHB).
RULE: Dollar-cost averaging is the best way to invest.
Investing the same amount of money in the same securities on a regular basis is a safe way to play the markets because you’re buying more shares when prices are low than when they are high.
When to break it: Research shows that investing a lump sum all at once often pays off in the long run. That’s because stocks and bonds perform better than cash over the long term, so by going all-in you gain that exposure sooner. Vanguard research going back to 1926 found that investors with a portfolio of U.S. stocks and bonds would come out ahead two-thirds of the time by investing in a lump sum than through monthly installments. Still, if you’ll need the money in a few years, stick with dollar-cost averaging in case the markets tank soon after you invest.
(Miriam Cross is a staff writer at Kiplinger’s Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org. And for more on this and similar money topics, visit Kiplinger.com.)
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