For new investors, the allure of a hot stock tip from a friend, colleague, or slick salesman can be too much to ignore. This is a common desire on the part of many investors. They want to hit a homerun with a small investment the first time up to bat. Sadly, the outcome is usually different. Too many investors fall prey to the hot stock tip hoping to earn outlandish returns in lieu of solid, on-going financial planning. There are three severe drawbacks to falling prey to the hot stock tip: investors end up with an investment that is not in line with their risk tolerance, it doesn’t fit into their investment plan, or worse, it costs them money they couldn’t afford to lose in the first place. Gambling, anyone? Buying a stock on a tip without consideration for your risk tolerance, your goals, and your ability to possibly lose that money is akin to gambling.
Being a financial planner, I often encounter people who ask me about hot stocks to buy, or tell me they have a tip on a hot stock that is a guaranteed winner. Poppycock! No stock is ever a guaranteed winner and we all need to keep that in mind. Furthermore, as a Certified Financial Planner™ I’m not a broker or day trader who buys and sells equities daily. Not my job! Financial planning is much more than the buying and selling of shares of stock.
As an investor, especially a new investor, you should first determine your personal risk tolerance. A financial planner can help, and there are available online tools as well that gauge your tolerance for risk (think possible loss) of your investment. Knowing your risk tolerance will help you determine the amount and types of investments you will be comfortable making. Next, determine how much you can afford to invest and work with a financial planner to setup a diversified portfolio that matches your risk tolerance, timeline, and your goals.
Buying a single company’s stock based on a tip you heard on the street is not sound investing and could lead to losses you cannot afford. If you do not already have an investment portfolio, risking money you have to start investing on a single stock is not a sound move. Chances are, if you are hearing the hot tip on the street or from a friend, the investing firms on Wall Street heard it long ago and the stock may be at or near it’s high. Worse, other traders may already be preparing to short the stock. There are just too many unknowns.
Investing is emotional and no one likes to lose money, but losses can and do occur. As a new investor, or even an investor with some experience, keep the following in mind.
1. Don’t chase returns. How the stock performed last month or last year may not continue.
2. Don’t chase news (market timing). Chasing news and trying to time your investment is a losing proposition. If you’re reading or watching the news about the stock, it’s likely too late to make a move. Again, professional traders have likely beaten you to the punch. It’s also important to know that many professionals earn a commission on the trade, not whether the stock performs well or meets your criteria. They may earn a commission when you buy, and when you sell.
3. Don’t invest money you can’t afford to lose. This is tough for a lot of people. They have a little money and want more and see buying a single, so-called hot stock as a quick route to riches. Keep in mind that any money you invest stands a chance of being lost. If you can’t afford to lose it, don’t invest it.
4. Don’t buy based on a tip or hot stock recommendation. Period!
There may come a day when properly analyzed individual stocks fit the bill for your investing plan. By that time, you will have more experience and better understand that investing is not just buying a stock. Until then, know your risk, put a plan in place, and don’t rush to invest more than you can afford to possibly lose.
Know that all investing involves risk, and you should always seek help if you are not sure about what you are doing. As an independent Certified Financial Planner™, I can help you. No matter where you are in life, a CFP® professional can help you create a financial plan for today and tomorrow. #LetsMakeAPlan #CFPPro #talktometuesday #Hireaplanner #mutualfund #fees #hottip #stock