Investment Basics

Before you get overly excited about investments, here are a few fundamentals to keep in mind:

1 - Diversify: Don’t put all your eggs in one basket. If you receive an inheritance, don’t buy a single stock, or a single property, or a single CD. Put some of it in stocks, some in bonds, and some in real estate. Even a few lottery tickets wouldn’t hurt. If your portfolio consists entirely of exchange traded investments, diversify within the portfolio (If you are 100% invested in bio-technology, and the bio-technology industry takes a nose dive, so does your wealth).

2 - Go Long Term: Unless you have no transaction costs, know a professional, or have insider information, don’t day trade. I recommend a buy, hold, and forget strategy. The longer the investment horizon, the lesser the statistical probability of a net loss, and the greater your actual returns will be. (Trading on insider information is illegal and the SEC is better than you think at finding you.)

3 - Reduce transaction costs: Most online brokerage houses have pretty nominal fees as long as your transaction size is large enough. Make sure you use a brokerage house with low fees, but more importantly make sure that your transaction size is large enough to warrant the fee. I normally don’t trade unless I can put at a minimum $1,000 into the transaction. That way a $7 fee costs me .7%. That same fee would cost me 7% if I were to put $100 into the transaction. If you have large transaction sizes and use a buy, hold, and forget strategy - you shouldn’t have to worry about transaction costs.

4 - Know your risk tolerance: Are you retiring in 3 years? Is the money you have money you can lose? How much do you care if you lose your money? Is there any chance that you will need the money to finance future educations, a house, or other life events?