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
