Sound Investment Principles

Some people have asked me about my investment strategy.  Here are some investment principles that have paid dividends.

  1. Buy what you know.  What companies or sectors do you know?  What products do you use?  Are they good companies with promising futures and good growth prospects?  If so, buy some of their shares.  But do your homework first.  Buyer beware.
  2. Don’t try to time the market, but know the season.  It’s folly to jump in and out of the market when you think it’s going up and down because sometimes you win, sometimes you lose.  It’s better to look at the long term and invest accordingly.  What’s in store for this year or the next few years?  Do you believe the market do well this year?  What do the experts say?  If you have a broker, what does he or she say?  Going with your gut instinct is often the best check and balance to investing.  If it sounds too good to be true, it probably is.  Likewise, the situation never seems to be as dire as some predict.
  3. Don’t spread yourself too thin…concentrate.   Don’t try to track too many stocks or funds.  Pick a few (up to 10-12) that you like and focus on them.  Study them and look at their fundamentals such as P/E ratio and EPS.  Professionals don’t try to track too many stocks, and you shouldn’t either.  Add or remove companies as they under- or outperform.
  4. Don’t sell too high or too low.  Since you can’t time the market, set upper and lower price limits to trigger buys and sells.  Don’t ride a stock to delisting; get out while you can still recover some cash.  Don’t wait for an investment to reach an unlikely price target.  Better to get out while you’re ahead.
  5. Watch those fees.  If you don’t feel like a savvy investor, read the fine print before hiring a broker or buying a fund.  Sometimes the fees can be in excess of 2% of the total principal, meaning that your broker would have to outperform you by at least that much to justify the fee.  Sometimes doing it yourself – and employing available investing tools such as stock and fund screeners – yields better returns (or fewer losses) than hiring someone to do it for you.  If you feel more comfortable using a broker, ask them for their fee structure up front.  Some will charge a fee to open and close account as well as monthly wrap fees.  These can be palatable if your broker offers a low fee structure (1% or less) or handles your account carefully. 
  6. Move past the basics of investing.  The smartest investors don’t put all their eggs in one basket.  Consider real estate, a small business, options/margin trading, micro-loans, IPOs and private equity investments to diversify your portfolio. lets you offer higher interest loans to Americans, and does the same for international micro-loans.  Try the IPO market.  W.R. Hambrecht offers periodic open IPOs.  Try angel investing or secondary shares of privately held companies on a site such as or offers real estate and businesses for sale around the world.  Try investing in foreign markets or currency trading. facilitates trades in foreign exchanges and currencies.  (Disclaimer:  I have investments through some of these sites but have no personal financial stake in them.)
  7. Make investing a habit.  These are several basic investment strategies you can use to improve your financial situation by investing just $50 per month (every little bit helps):
  • Open a Roth IRA and invest in it as an after-tax retirement benefit;
  • Increase your 401(k) withholding until it hits the annual ceiling;
  • Open 529 accounts for your children and set the money aside for future college expenses;
  • Set the money aside in a Health Savings Account (HAS) or Flexible Spending Account (FSA) to pay for anticipated expenses tax free; and/or
  • Pay an additional $50/month on any credit card debt and/or mortgage.

What you should NOT do:

  • Spend the money on depreciable fixed assets (aka “stuff”).
  • Spend it on dining out, entertainment, or any expense that offers a one-time benefit.

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