If you’re looking for a hot stock tip…..sorry, you’re in the wrong place! But today I will tell you a few things to consider and to look for if you’re just getting started with investing or looking to start building a solid investment portfolio.
While we’re on the topic of stock tips, here’s my tip of the day: be very careful of stock tips! If someone tells you about a stock they just know is going to the moon any minute now, at least do some research before you throw even a penny at it. I will never forget the first hot tip I “invested” in (it wasn’t my first investment, just the first one I jumped into without doing any research). And I decided to really clean up on it, so I didn’t buy the stock, I bought options on the stock (my recent post on options will tell you why this wasn’t as good an idea as I thought). It was Quaker Oats, maker of oatmeal, porridge, and lots of other healthy stuff you didn’t really want to eat for breakfast.
A co-worker told me that his brother-in-law, who was a stockbroker (cue the music from the movie Jaws), just told him that they had information the stock would soar because the company was going to get bought out any minute now, definitely by the end of next week. It did get bought out….7 years later. Even if I had bought the stock I would have made a very small annual gain, but since I bought the options, I lost it all. Twice, because I doubled down on my ill-fated strategy a month later.
Another thing to stay away from is advice you hear in the financial media, particularly CNBC. As I’ve said before, the website is good, but the TV channel should be watched for entertainment purposes only. The talking heads that are interviewed throughout the day give out “free” buy and sell advice, but they are doing it to benefit themselves, not you. Avoid these “tips” unless you are hoping to generate capital losses.
Ok, enough about what you shouldn’t do…what should you do? I’m not going to give you one-size-fits-all advice on how to start your investment portfolio, but in this post I’ll give you a few things to consider, and much more in the weeks and months to come.
First, a few things to think about for those who are not necessarily looking for the “excitement” of individual stocks. When you have started to build up some money to start your investment portfolio, I would construct what should be the portfolio’s long-term core: index mutual funds. I know, the stockpickers out there are unsuccessfully trying to stifle a yawn, but I really believe this is the optimal way to get started, especially for those not interested in doing research on stocks. A good place to start is with Vanguard, the pioneer and leader of the index fund universe. My upcoming books will help you with asset allocation, or which types of asset classes to put your money into. Even if you start with a total stock market and total bond market fund…you’re off to a good start.
Now, for those of you how want to buy a stock, including the dozens of former students who asked me about this after class (which I sincerely miss; I enjoyed talking to all of you, and it’s something I haven't been able to do as much in our current online world). Again, I’m not going to give you any stock tips, but I will tell you a few things you might want to look for.
A good place to start is a product or service you use and like, particularly if it’s new. While I don’t recommend hot stock tips, I think looking for hot products, things that are just becoming very popular, is a good way to find successful companies. Of course, their stock will need to publicly traded for you to invest in them, so do some research and find out who the producer of the product is and what they’re all about. I think college students and recent grads are in a particularly good position for this approach, as it’s that demographic that tends to know about and use products and services that are on the cutting edge (some of my contemporaries are still trying to figure out why their 8-track tapes won’t fit into the floppy drive of their computer).
Make a list of your favorite products and services, and/or things you see on the way to become popular. Find out who makes them, or who owns the service. In the next blog post I’ll tell you a few other things to look for, and what to do with this information.
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