Be Wary of Sales Calls and Newsletters If you have an account with a full service stock broker you have probably received a call similar to this: "I've got a hot stock that should go up 20% within 2 weeks.
We've got to buy before the earnings come out.
I need a decision right now.
Are you in?" How about the email from a stock touter who has averaged 40% returns for the last 3 years saying to dump stocks and buy commodities.
Great.
Why? Some tips are great, some are garbage.
The big problem is how do to differentiate between the two.
There are a few things to consider when deciding whether to take advice from a broker making a cold call, a newsletter or pundit.
Think about the advice being given.
If the idea being presented is such a great idea, chances are the smart money got in months ago and you're buying too late.
Also, if the person disseminating the idea is so smart, why are they trying to sell you a $1000 newsletter? Your best defense against making a poor financial decision is education Read books by those who have been investors for decades.
Watch You Tube videos, read up on politics on not only the US but worldwide as well.
If you are thinking of making an investment, take your emotions out of the decision.
Develop a hypothesis.
Then back it up with iron clad reasoning.
Once you're satisfied, pull the trigger.
An Investment decision may go as follows: Your investment hypothesis: I think gold is going to go up to $1500 within the next 12 months.
Reasoning: The US and governments around are printing up money and running huge deficits.
The Chinese government has been buying metals heavily over the last year and will most likely continue to do so.
I've confirmed this by reading the Wall Street Journal as well as Investors Business Journal.
Interest rates: Interest rates are at historically low and must rise eventually.
Gold is a good hedge against inflation.
I've confirmed this by checking the historical chart for gold.
I overlaid a chart of inflation against the price of gold.
Politics: Only 30% of the Stimulus Bill has been spent.
When the rest of the money gets spent, the economy will heat up, pushing gold up to new highs.
During the 70s, gold was the best performing asset class of the decade.
I believe we're entering into a similar situation.
My portfolio situation: I have no gold or commodities in my portfolio.
I have done extensive reading and have come to the conclusion my portfolio needs to reflect a 10% asset allocation to off -set a possible decrease in my stock portfolio.
You have now done your research and you are ready to purchase gold.
I'm using gold as a random asset class and this is just an example of how you should be doing your research before investing.
Do not buy gold based upon any reasons given here.
This is just an example.
Before you call your broker or go online to make your purchase, you need to ask yourself "What if I'm wrong?" If you invest, you make incorrect decisions.
Some will be wrong a little, some wrong a lot.
How you react to an incorrect investment will determine your retirement or investment account.
What if you're wrong about your Investment? Stop Losses: You've done your research.
You've determined the timing is right to make your investment.
What if your investment goes down 10% in a week? What if it tanks 25% and you have a sizable loss? You cannot invest one penny of your hard earned money until you have a written investment plan.
You need to know how you're going to react in advance.
"I am a long term investor.
I need 10% of my portfolio in gold.
Because I'm conservative, I'm going to invest $1,000 for the next 12 months and average my cost in.
This $12,000 investment will reflect 10% of my portfolio.
" You can then call your financial advisor and get his/her opinion.
A good advisor will give you their opinions on your particular investment idea.
Whether you take that advice is your decision to make; it is your future and your call to make.
Wrapping it up There is no absolutely perfect investment plan.
Different types of investments will thrive in different types of economic cycles and economies.
Your best defense for an under-performing portfolio is to be educated, have a solid team (a financial advisor, accountant, life insurance agent) on your side and do your homework.
Have the best brains in the business as your business partners and your investments should thrive.