December 12, 2011
Banks, hedge funds and mutual funds hire teams of professionals whose job it is to find the best investments for their clients. They learn about the product, visit the company, talk with the CEO, and do extensive statistical and fundamental analysis before recommending a particular stock.
As a beginning investor you do not have access to this information. A company’s title may be contained on a mutual fund prospectus, but without the underlying research. You are then faced with making some basic choices. Should you attempt to go it alone or rely on the experts, keeping in mind that even they are not 100 sure of outcomes. Take the recent meltdown in 2009-2009. Few saw it coming. Trillions of investment dollars were lost.
You have some hard choices to make. First, how much do you have to invest? If you lost everything, would it change your lifestyle? If so, think again about going into the stock market. Only invest monies that you can comfortably risk.
Once you’ve decided to invest, ask yourself this. If things go bad and my investments go against me, how much am I willing to lose. Most people invest thinking that they will always make money. This is the greatest mistake that new investors make. You must set limits on your losses. 20 should be your maximum. This means that if you invest in a mutual fund you must set a stop loss order, risking no more than 20.
Unless you are a mathematical genius who can spend 100 of his/her time trading, forget about it. Banks and large institutions have hundreds of traders who use computerized models. They are able to trade in nanoseconds.
For the beginner, choose a five star mutual fund rated by Morningstar. Set limits on your losses. If trading is your goal, try working for a large trading house for a few years to learn the ropes. Your trading record will be monitored and you can judge if trading is for you.
