The Best Way To Steer Clear Of Idiotic Investing Errors

Smart people sometimes make silly mistakes in terms of investing. Part of the reason for this, I guess, is that a lot of people don't have the time to learn what they really need to know to make good decisions.

Don't Forget to Diversify

The average stock market return is 10 percent or so, but to earn 10 percent you need to own a broad range of stocks. In other words, you need to diversify.

To make money on the stock market, you'll need around 15 to 20 stocks in a variety of industries. (I did not just make up these figures; the 15 to 20 number comes from a statistical calculation that several upper-division and graduate finance textbooks explain.)

Have Patience

It's important for investors to have patience. There will be many bad years. Many times, one bad year is followed by another bad year. But over time, the great years outnumber the bad.

They compensate for the bad years too. Patient investors who remain in the market in both the good and bad years almost always do better than people that try to follow every fad or buy last year's hot stock.

Invest Regularly

You may already know about dollar-average investing. Instead of purchasing a set number of shares at regular intervals, you buy a regular dollar amount, such as $100. If the share price is $10, you buy ten shares. If the share price is $20, you purchase five shares. If the share price is $5, you acquire twenty shares.

To make dollar-average investing work with individual stocks, you have to dollar-average each stock. In other words, if you're buying stock in IBM, you have to buy a set dollar amount of IBM stock each and every month, each quarter, or whatever.

Do not Ignore Investment Expenses

Investment expenses can add up quickly. Small differences in expense ratios, pricey investment newsletter subscriptions, online financial services (including Quicken Quotes!), and income taxes can easily subtract tens of thousands of dollars from your net worth over a lifetime of investing.

Investment expenses may add up to really big numbers when you realize that you simply could have invested the money and earned interest and dividends for years.

Don't Get Greedy

Individuals make all sorts of foolish investment decisions when they get greedy and pursue returns that are out of line with the average annual returns of the stock market.

If an individual tells you that he has a sure-thing investment or investment strategy that pays, say, 15 percent, do not believe it. And, for Pete's sake, don't buy investments on a shell company or investment assistance from that person.

Don't Get Fancy

For years now, I've made the better part of my living by analyzing complex investments. Nevertheless, I think that it makes most sense for investors to stick with very simple investments: mutual funds, individual stocks, government and corporate bonds, etc.

To add to these simple investments, ask an investment expert about merge companies and financial mergers.

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