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Answer:
Dear
BuyandHolder,
A
very good question!
Mistake
#1
The
answer is not knowing if the stock one is purchasing
is an income-oriented security or one that is likely
to increase in price.
Many
individual investors, and especially new investors,
tend to lump stocks all together, not realizing that
they come in at least two different flavors.
The
novice is likely to pick a stock because he's read
about, he heard it mentioned in the news, or a friend
told him about it. For these and other reasons, he
may think it's "hot". He buys without taking time
to determine precisely what type of stock he's adding
to his portfolio.
Then,
if the stock hovers around the same price, not making
a spectacular move because it's an income-oriented
security, such as a REIT (real estate investment trust)
or public utility stock, he will be disappointed.
Bottom
Line: Know if you are buying for income or appreciation.
Mistake
#2
The
second most common mistake is buying without doing
research.
You
get advice on the golf course. You hear someone discussing
a stock at a party. Your brother-in-law has some news.
Nothing wrong with listening to ideas but...
Never
buy a stock without doing your own research. Know
what business the company is in. What its position
is within its industry. The 52-week high and low.
If
you've been reading this column over the years, then
you know all about P/E ratios, debt levels, research
& development commitment, balance sheets and other
factors that are absolutely critical in selecting
stocks.
You
also know, that I think it's important to check out
a potential stock in Value Line Investment Survey.
This weekly publication contains updated reports by
independent analysts on stocks in all industries.
You can probably get a copy at your public library
or a trial subscription at www.ValueLine.com.
Bottom
Line: Get the facts.
Mistake
#3
Think
Enron! Never put all your eggs into one basket, whether
that basket is filled with one stock, one mutual fund,
or one bond. Every investment comes with risk -- some
stocks, bonds and mutual funds are conservative choices.
Others are higher in risk.
Diversification
is key to spreading out risk, protecting your investment.
Be sure to read two columns on the topic: Asset
Allocation and The
Importance of Industries.
$Tip:
Many investors actually maintain nicely diversified
stock portfolios but forget about the importance of
doing so when it comes to their 401(k). In their retirement
account they're likely to own too much of their company's
stock. Or, only one or two investment choices from
the menu available.
Don't
you make that mistake. Or if you have, correct it
the next time you are allowed to change your 401(k)
or 403(b) holdings.
Bottom
Line: Be Diversified
Good
luck!
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