On the hit program NCIS, special representative Gibbs and group often mention his list of rules to live by.
Guidelines that assist our buy and offer decisions regardless of short-term psychological swings in the market. Policies that stable our feelings and keep us out of trouble; guidelines that keep us in the game even when we want to run for the exits. In my upcoming book, I present 11 smart investing guidelines. Policy No. 2: Never, never, never buy a stock in a business you do not understand or does not satisfy your risk and investing goals.
I am regularly asked about particular stocks. What do I believeconsider XYZ Corp.? It is a question I cant answer because to do so would breach Guideline No. 2. Heres why: I would needhave to familiarize myself with the underlying companys business, its market share, success, growth rate and competitive position. And most essential: evaluation. I would really want to understand even more about the questioners threat tolerance and investing goals. All of which takes some time and study.
I understand the motivation behind the concern. We are enamored of the stories we hear at mixed drink parties or the health club or on the sidelines of the soccer field– stories of a fast double or triple in a stock. Some of us have waited a little too long to conserve and invest for retirement and we believe a few home-run stock choices may fix the problem.
But, going after somebody elses stock choices is a fools game. And because most of us ignore the mathematical rule of 72, we overestimate the time it considers our cash to double in value. To calculate, we take our assumed rate of return and divide it into 72. If we presume the typical historic return for the stock exchange of 9 percent and divide that into 72, we can assume our cash will certainly fold eight years. In a perfect world. Keep in mind: 9 percent annually is the typical return for the stock market over the past 100 years. Sometimes stocks increase a wonderful discounta lot more or decline considerably. But when we are preparingpreparing for the future we are forced to utilize averages, and in this case doing this provides an estimate that our savings must double in 8 years.
Dont reach for return by taking on too much risk or chancing on a hot stock pointer. Consider my Intelligent Investing Rule No. 2 or, even better, keep in mind Gibbs Guideline No. 51: Often youre wrong.
The chances of being wrong with a high-risk home-run stock are much greater than when we research and purchase stocks to have for a life time. And the objective for investors is to be wrong just possible with our hard-earned money.
Next week: Intelligent Investing Rule No. 1: The best ways to keep from going after the next safe bet.
Nancy Tengler spent two decades20 years as a professional investor. She is an author, financial-news comment ator and university teacher; her book, The Womens Overview of Successful Investing, will be released by Palgrave Macmillan this month. Reach her at email@example.com.