Posted by Tim Stobbs on July 23, 2007
A comment on my last post got me thinking about how to determine if you can do your own investing. After all if your constantly chasing the latest ‘hot’ investment or selling off at the slightest dip, you can do a lot of damage to your own money.
So what do you need to do your own investing? Surprisingly not a lot, but it does require some honest self assessment.
Step 1 – Are you an active or passive investor? If you are stock geek and can honest say you will read every little bit information about every company you own (and any company that you are thinking about owning) and also be willing to do additional industry research. Then congratulations you might have the knowledge base to do active trading in individual stocks. Yet you will also need to assess your ability to handle loss and your emotional involvement. So if you can’t sleep at night with a 10% loss to a stock you own then you should not be an active investor.
So if you failed the above test you are a passive investor. Don’t worry this isn’t a bad thing, its just realizing your own limitations and working with them. Your goal in being a passive investor is to use index stocks and ETF’s to remove much of the emotional decision from buying a stock. I think every one likes to think they can be an active investor, but the reality is very few people can do it well.
I had a fortunate experience when I was a teenager to do a stock invest project in school where a group of us actually bought a penny stock and watched it come up and then crash down. So I learned the hard way. I’m not an active investor.
Step 2 – Research your strategy. Now investing weather it is active or passive can follow many different paths depending on your risk tolerance and your goals. Now you have to look into your local library’s personal finance section and start reading. Your immediate goal is to read at least 10 books before deciding what will work for you (for suggested reading check out the book review posts on this site and other blogs).
Step 3 – Remove emotional issues. Review the strategy to remove as much emotional decision making out of it as possible. After all your number one enemy will be yourself in doing your own investing. That’s why I use a series of index funds and balance them once a year. There is no emotion in the decision. I just sell and buy to get myself back to my original investment targets.
Obviously I can’t cover everything about doing your own investing in one post, but for most people I think it can be a good thing for one main reason. No one in the world care more about your money than you. At the same time if you know you are emotional and lack the discipline to execute you own investment plan, then you should seriously consider using a advisor. After all those fees might be worth it if it keeps you from losing too much money.