A lot of individuals have a distaste for Wall Street and all the excess greed it represents. What images come to mind? I often envision the cinematic masterpieces of Oliver Stone’s Wall Street and Martin Scorsese’s Wolf of Wall Street. These movies showcase the intoxication of greed and moral turpitude that runs rampant. I personally, however, view the stock market as a necessary investment vehicle to stay ahead of inflation. The days of yielding 4 or 5 percent on a Certificate of Deposit (CD) have long past. The stock market can certainly be risky, but there are ways to reduce volatility.
Diversification is the key to any good portfolio. What does diversification really mean? Basically, it refers to holding stocks in various sectors of the economy in order to minimize risk. If you have all of your money in one sector, such as the oil and gas industry you are probably sick to your stomach. This sector of the economy has been hit hard over the past two years. However, if you invest your hard earned money in several sectors, such as consumer goods, finance and healthcare you might be in better shape. So, diversification is really a risk management technique that helps protect your investment portfolio.
If you decide to start investing on your own, which means you are not hiring a professional financial advisor, I have a few tips to help you get started. First, you need to ask your self some important questions: What are your goals? What is my knowledge of investing? And more importantly, what is my risk tolerance?
What are your goals? This question is vital because you need to know what you want to achieve as a result of investing. Are you trying to generate extra income for retirement or trying to increase your capital through growth stocks. Personally, I prefer stocks that pay a good dividend. I guess you would consider me an income investor. I do, however, have a few growth stocks. Remember, diversification. There are many different shapes and sizes to managing your portfolio.
What is my knowledge of investing? If you do not have a great deal of knowledge investing in the stock market, I would suggest reading as much as you can about it. Personal finance blogs (hint, hint) or just reading a few books is a good start. Below is a short list of blogs and books I would recommend:
Retire by 40 – One of my favorite blogs. Joe Udo, who is a retired computer engineer, meticulously details his personal finances and offers a variety of interesting topics that will help you inch closer to retirement.
Mr. Money Mustache – Another informative blog that preaches frugality and how to do more with less.
The Intelligent Investor by Benjamin Graham – Considered one of the best investors of our time and was a mentor to Warren Buffett.
Rules of Investing: How to Pick Stocks Like a Pro by Michael Sivy – Thorough guild to investing and hands downs my favorite investing book.
What is my risk tolerance? This is perhaps the most important question to ask. There is always a chance that you could lose your money if a company goes bankrupt or at least lose a fair amount if the corporation experiences a rough patch. However, you can minimize that risk by investing in good solid blue chip companies like Wal-Mart, General Electric, Walt Disney and AT&T. These are good companies that have a long history of having sustainable profits and normally pay a solid dividend. In the end, you have to prepare yourself for the ups and downs of the stock market.
After you answer these questions and do the needed research you are now ready to start investing. I would suggest investing in a blue chip company like Wal-Mart or AT&T to get started. These are pretty safe companies and it can be a way to ease yourself into investing. The great thing about these stocks is you do not need a professional broker to purchase it. These companies are represented by Computershare, which is a stock transfer agency that allows you to buy directly with the company. Another good stock transfer agency is Wells Fargo – Shareowner Online. I have personally used both transfer agencies and believe this is the way to go.
I hope the information I provided helps you get started. Always remember to invest for the long-term and choose quality companies. Good luck on your investing journey!