Investing in stocks can leave bruises

November 20, 2005|By CAROLYN BIGDA | CAROLYN BIGDA,TRIBUNE MEDIA SERVICES

Forgive the sports analogy, but investing in individual stocks is somewhat akin to an average person playing a game of professional football.

"The odds are against you; expect to get bruised," said George Paquin, a fee-only financial planner in Chelmsford, Mass.

There are many reasons that is so, including the practical (we just don't have time or interest to properly research companies) to human nature (we get cocky and think we can outmaneuver the market anyway).

Still, nearly half of investors own individual stocks, according to a survey released recently by the Securities Industry Association and the Investment Company Institute.

And Morningstar Inc., the Chicago-based fund-tracking firm, recently published a series of workbooks on stock investing, beginning with How to Get Started in Stocks (Wiley, $14.95).

Paul Larson, the lead writer and a Morningstar equity strategist, argues that investors, when committed for the long term, can earn a percentage point more per year because they don't give up returns to high management fees and, theoretically, are compensated for the extra risk.

The key is commitment, the ability to stomach daily price fluctuations, keep a long-term perspective and diligently read financial statements, among other things.

"There's definitely some work that's involved in buying individual stocks," Larson said. "Most of the time there is going to be lessons on the way, and people need to expect that."

Still interested? Here are a few pointers on how to get started.

Save first. Don't risk your only cash in stocks. "They are not supposed to be used as a savings account," says Paul Mladjenovic, author of The Unofficial Guide to Picking Stocks (Wiley, $16.99).

Instead, pay down credit card debt and build an emergency fund worth three months of expenses first. That way you won't have to abruptly sell your stock holdings, potentially at a loss, should you suddenly require the cash. And you won't feel as pressured to turn a profit right away.

Start small. Once you're on sound financial footing, allot a portion of your investment dollars to an equity index fund.

I'm not trying to be confusing here, but as you ease into stocks you'll want to start with (and may only have the money for) a few shares. And investing in an index fund will help anchor your portfolio.

"You'll get the market return via the index for the majority of your portfolio," Larson said. "And with a smaller portion, you can try to beat the market with your best stock ideas."

Watch fees. When you're buying or selling stocks, particularly in small numbers, you need to cut commissions, or the fee charged for each trade, to a minimum. The rule of thumb is 1 percent or less of the trade value.

Discount brokerages are the place to start. For example, Scottrade (scottrade.com) charges $7 per online trade. If you buy or sell $1,000 worth of stock, you pay 0.7 percent in fees.

Also consider the direct reinvestment programs offered by some companies. Once you own at least one share you can elect to have dividends reinvested.

Stay put. Don't turn into a day trader. Investment gurus recommend you hold onto a stock for at least three years.

Even then, there's no guarantee you'll come out ahead, but if you've done your research - and continue to do it - you have a better chance of coming out of the game a little less black and blue.

Carolyn Bigda writes for Tribune Media Services.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.