| New Year's
Resolutions for Investors |
 |
With
the beginning of a new year, many people like to make resolutions
- promises to eliminate some bad habit, lose weight, or in some
other way improve on the past year. For investors, the last year
was an object lesson on media hype, stock market euphoria,
bubbles and bubbles bursting. There are some lessons there from
which we can learn. So here are some New Year's Resolutions you
may want to consider for yourself (in no particular order). I
know some of them apply to myself as well!
- I
will not chase a stock. - In a year that began
with soaring technology stocks, many were tempted to
plunk money into high performance stocks. This is all
well and good if the stock is coming off a basing
pattern, but if the stock has recently surged and is
still surging, wait for a consolidation and new basing
pattern to form. Don't just invest in a stock because
everyone else is.
- I
will do my due diligence - People poured piles
of money into go-go stocks trading at high multiples that
were flying high on fumes - no real gas in the engine.
People did not even bother to look at revenues and
earnings. And most of these stocks came crashing back to
earth again later. Look for growing revenues and
earnings. Losses are acceptable in a young and growing
company as long as the losses are decreasing quarter to
quarter and fast approaching a profitable position.
- I
will understand why I am buying a stock - Here
I'm talking about investing philosophies. There's a value
approach, a momentum approach, an asset allocation
approach and more. Different stocks are bought for
different reasons and with different expectations. Some
stocks you may buy for the long haul. Some may be
speculative. And some may be momentum driven. Understand
your reasons for buying the stock and you will be able to
develop an appropriate exit strategy.
- I
will have an exit strategy - This is a biggie
for me as I was up a considerable amount in paper profits
early in the year, but did not have an exit strategy. Or
rather, I bought a lot of stocks on momentum and had a
buy and hold exit strategy. And so I watched all my paper
profits turn into a loss. Your exit strategy should match
the stock and your reason for buying it. But regardless
of your purchase rationale, you should set an absolute
loss limit on your original investment. If the stock
soars, continuously set new points at which to get out if
the stock starts to falter, particularly if the stock is
becoming overvalued as it rises. Remember that you can
always sell a stock and buy it back at a later time. See
my Selling Strategies series for suggestions.
- I
will develop an investment plan - Many people do
not have a sytematic approach or plan when it comes to
investing. Many are, as value investor John Price puts it
- anti-investors. They rely on the hot tip from the buddy
at work, the mailman or their auntie! Develop a strategy
that suits your personality and works for you. But have a
plan.
- I
will consult an investment advisor - If you are
not already consulting an investment advisor or financial
planner, make a resolution to do so this year. And the
sooner the better. You may want to consult several to
find one you feel comfortable with and who you can
discuss your investment ideas with. You may want to have
one to consult on a systematic savings and retirement
plan and a different one for aggressive and speculative
investing.
- I
will not be afraid to take a loss - This relates
to exit strategy as noted above. Some people are
terrified of taking a loss. And so they will hang on to a
losing stock for years in the hopes that it will go up
again. As noted above, take your losses early if a stock
goes against you. And then move on and find a better
investment.
- I
will not become emotionally attached to a stock -
As a Canadian, I have to admit I was damn proud that
Nortel became a heavy-weight international giant and felt
a certain fondness for the company. But the company and
the company's stock are two different things. Love the
company. Don't love the stock. Treat the stock absolutely
objectively. If it no longer serves your purpose - making
you money - dump it!
- I
will read at least two good books on investing -
I'm a huge believer in increasing your investment
knowledge and recommend reading at least two investment
related books each year. Try and vary them, sampling
different topics and approaches to investing. For
example, read a book on value investing, then another on
the momentum approach, perhaps a book on tech stocks or
one on options trading. Personally, I try and read around
six. I have just finished reading the three books in the
Rich Dad series and am currently reading a book on
selling strategies and another on options.
- I
will learn about at least one new investment vehicle that
I have not tried before - There is more to
investing than mutual funds and stocks. There's real
estate, options, commodity futures, and currency
speculation. Not all of these are for everyone, but it is
to your advantage to at least understand the alternative
investments available.
- I
will learn to read financial statements -
Financial statements are not difficult to understand. So
if you currently don't know how to read them, pick up a
short book on the basics of accounting. Learn what a
balance sheet is, or an income statement.
- I
will get control of my debt situation - Out of
control debt, run-up credit cards, and excessive spending
are one of the greatest killers of financial plans. If
your debts aren't declining, consult a financial planner
immediately and get your house in order!
This list is
hardly exhaustive, but it is a good start. Do you have some
financial new year's resolutions? Why not post them in the forum
thread I started! See the link in the box above right.
Have a great New Year everyone!
Comments?
Suggestions? Why not post them on our Bulletin Board or email me.
E-mail me!
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