What should I buy?

Cheat Sheet

Here are a few investment approaches:

  • Buy what you know
  • Buy what you think is undervalued
  • Diversify!
  • Buy a fund

People use a variety of investment strategies and philosophies when buying stocks. An investment strategy is a set of guiding principles that help you decide what to buy and when. 

Invest in companies you know.  If you like a company’s products and services or what it stands for, why not get in on the action?  It’s a good idea to do your homework on a company to decide whether it’s worth putting your hard earned cash into it.  Being a customer and knowing the company’s products can give you a leg up.  

Buy stocks you think are undervalued.  Maybe your favorite gaming company is coming out with a game you think is going to be a blockbuster.  Or maybe a stock you have been keeping an eye on tumbles 10% due to some bad news, but you think the market overreacted.

Diversify! This is a really big subject that we’ll be covering more, but for now we’ll just say this: when you you buy a mix of stocks, you have a better chance of making a profit while managing your risk.

Invest in a fund.  If you can’t beat ‘em, join ‘em, right?  It’s not easy to beat the market’s average rate of return (which is historically pretty great: 9.8%), so a good strategy is to invest in funds that track the market.   A fund is a collection of stocks. An S&P 500 index fund literally has all 500 stocks that make up the S&P 500 index.  So if you buy that fund, you’ll own a piece of all 500 stocks in one fell swoop.  Other index funds track foreign stocks (say, Japanese stocks).  Other funds track the price of a commodity, like gold or cocoa.  Still others track bonds.  Funds come in two main forms — exchange traded funds (ETFs) and mutual funds. A famous investor, John Bogle of Vanguard, is a big index ETF fan.

Stock Buying Advice from the Pros

  • Buy what you know. – Peter Lynch
  • Buy wonderful businesses at a fair price with the intention of holding them forever.  – Warren Buffett
  • Don’t put all your eggs in one basket. – Cervantes