Tips for stock market investing

“Hot Tips” can burn

Is stock market investing a game to you? Is it mainly a source of fun and stimulation? Or is investing serious business -- an important way for you to build the size of your net worth over time ... for the benefit of your family, in order to retire earlier, or to pay for college expenses?

• If you haven’t figured this out yet, you should.

Many people think stock market investing is all about getting good tips. But this is a fool’s game—better for fun and stimulation than for producing meaningful long term growth in your stock market portfolio.

It is easy to get sucked into the game of chasing stock market tips. The sources of hot tips are plentiful ... your brother-in-law, a colleague at work, even the taxi driver may have stock market tips. During the tech stock investing craze several years ago, everyone seemed to have great stock market buying tips.

The financial media is full of stock market investing tips. Go to any newsstand and you can find magazines full of interesting company profiles and interviews with investment advisors offering their latest hot stock market tips.

If your investing orientation is pursuing hot tips, most stock market brokers will happily play your game. It’s their business to push certain stocks that their firms want to sell; and it’s easy to justify their commissions when you think you’re investing in a hot stock that could soar in value.

Stock market investing is about discipline ... not tips

Here’s the problem with chasing stock market tips: When you get caught up in the game and the excitement of the hunt, you can easily bypass the fundamentals of good stock market investing. Chasing tips, you can forget to maintain good diversification and you may not apply the important investing principals of asset allocation. Another extremely important stock market investing fundamental is the avoidance of large losses ... and when you’re chasing hot tips, what kind of disciplined approach do you have to know when to cut losses or lock in profits and get out?

• Perhaps you have experienced watching temporary gains in a stock disappear and then turn into deep losses.

Our tips for stock market investing

• Pursue a Disciplined Approach: This is a key to successful stock market investing.

• Diversify: Diversify among your stock market investments as well as among various asset classes (such as bonds, real estate, international stocks and bonds, etc.). Use a disciplined asset allocation approach.

• Avoid Large Losses: Protecting your principal from significant investing losses is fundamental to generating an attractive average return over the long haul. Use asset allocation and find a disciplined approach to monitoring your investments and knowing when to cut your losses or sell out to lock in profits.

• Avoid Chasing Stock Market Tips: Unless you have a solid discipline for knowing when to exit these investments on a timely basis, don’t do it. Don’t get caught in the trap of allowing a large loss on the investment and then rationalizing it to yourself that you are a long term “buy and hold” investor. That kind of investing in stock market tips is just an exercise in denial.