The world is full of abundance and opportunity, but far too many people come to the fountain of life with a sieve instead of a tank car... a teaspoon instead of a steam shovel. They expect little and as a result they get little - Ben Sweetland

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Friday, February 15, 2008

Advice for Novice Investors

Are you new to all this investing stuff? Just trying to learn what it's all about. Here are a few pointers. Don't take them too seriously, they're just bits and bobs I've picked up over the years, though (of course) I think it's pretty valuable stuff!

1. Don't visit financial advisers. No less a man than Peter Lynch starts his wonderful book 'One up on Wall Street' with 'Rule number one is: Stop listening to professionals!' They have no better chance that beating the market than any other thoughtful person, AND they are usually trying to sell you something on which they earn commission. Their mediocre advice plus their (often inflated) fees adds up to a mediocre investment, at best. I have NEVER bought a good investment from an adviser. As Lynch points out, you SHOULD take advice from a doctor, a lawyer, a teacher etc., since these people really do have specialist knowledge which you can't easily come by, but financial professionals have no greater insight that anyone else who is prepared to put in a BIT of effort.

2. Be wary of mutual funds. Same thing as #1, really. A fund house is selling you a product which probably won't even beat the benchmark (the market index) AND they will take an up front fee and a yearly management fee, regardless of how well the fund does! Now that is one scam you should aviod. Of course, there ARE good funds, but they are hard to find, so if you don't have the time or inclination to invest, shall we say 'actively,' it may be better to...

3. Use ETFs. These exchange traded funds usually try to track an index or a sector. Since the stockmarket has returned about 11% a year on average (though with huge swings up and down, of course), ETFs are good investment for the long term. They have very low fees since they require almost no management, and you can buy 'em and pretty much forget about 'em. But for the mpre 'active' ...

4. Buy stock. Stock in companies has been bar far the best investment over the last hundred years. The stock market has violent mood swings, and this is something you need to be prepared for, but in the long run this, if anywhere, is where you will make big money.

5. Do your 'Due diligence.' Don't just buy any stock. Alot of companies are terrible and getting worse by the hour. I personally don't go in for any kind of detailed security analysis myself - it would take far too long - but I do read up on the companies. there's alot of free stuff available, but try to get the opinions of experienced people: The Motley Fool CAPS is a good place to start, and TMF offers several newsletters dedicated to giving stock picks. Morningstar also carries reports on companies and it's star rating can be quite helpful. This is where paying for a service may be a good thing. You're not paying professional advisers with a vested interest in your buying a financial product; you're paying for objective advice and informed opinion. Of course, your own opinion is just as valuable, but listening to others, weighing it up, and engaging with a community will give you a head start.

6. Be patient. Investing is a long term thing. Stock doesn't just rise (well some does). Stock in good companies can fall, and when it falls, it often keeps falling. Stock in bad companies can keep on rising, and all this is very infuriating - the market is not rational! But in the end, if you buy good companies (and take advantage of the market dips to buy more) then they should eventually rise.

7. Be prepared. The market WILL tumble at some point and your investments will go with it. Be ready, and know that things will change. Use this as a chance to buy. Keep some cash in readiness.

8. Be rational. If you bought a good company at a good price, then keep it, even if the price falls a great deal. In fact, the rational thing to do under these circumstances is to buy more. We are not speculating, day trading or whatever. Sell when the stock becomes over valued or if the company changes for the worse.


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