This column isn't just for women, but rather just from the viewpoint of a woman investor. Because this is my first column, I'll start at the beginning and offer some of my basic thoughts about investing. I'm not a professional, but I have learned a lot about investing from my own experience and I would like to share it with you. I have a particular philosophy, with which you may or may not agree. Here are several things I think are important to do before starting to nvest.
Pay off any outstanding debt. Before buying stocks or other securities, it makes sense to pay off all credit cards and other debts first. There's sense in making high-interest payments each month while at the same time putting money into a stock that might only give a small return. My father always told me not to buy anything on time but a house. For everything else, I pay cash. I think paying off debt is the most important thing to do before beginning to invest. It is the cornerstone of my philosophy.
Know your goals. Literally ask yourself, "Why am I investing?" Is it for fun or to prepare for retirement? The answer to that question is important as it will guide you in determining the types of investments you need for your portfolio.
Determine the amount of money you can invest. Never use the money you need to pay your bills and general living expenses to invest. Investment money should come only from "extra money" that you don't need for necessities. Also, it's prudent to consider creating an emergency fund before you begin investing--to set aside at least three months salary, six months is better--in case you become unemployed or disabled.
Determine your risk tolerance. You must consider your own needs and amount of risk that you can take without losing sleep. How would you react if the stock you bought last week went down 25%-50%? Know the answer to that question before investing. I think one of the best ways to manage risk is to diversify. I have stocks in several sectors: technology, biotechnology, retail, telecom, customer products and services, automotive, financial, oil services. Besides holding stocks in various sectors, I also have money in bonds or bond funds. With this type of portfolio, I can cover most situations that would come up. And because these investments are from my "extra" money (money I can invest), I never have to worry about selling stocks at the wrong time.
Be disciplined. I invest long term, avoiding any short-term commitments. My investment time horizon is a minimum of five years, preferably 10 years or more. Many stocks take several years to show a good profit. Therefore, it's important for me to know why I am buying a particular stock: How are its fundamentals? Will it still be around in five years? I think discipline in investing, plus time and compounding, have increased my portfolio value tremendously in the long term.
Be responsible. I don't invest on tips from friends or analysts, I do my own homework. Ultimately, I'm responsible for my own investment decisions--good and bad. If someone says "it's too good to be true," it probably is, and I avoid this advice like the plague. I also never use margin. If I don't have the cash, I don't buy the stock. Then if bad times come, I won't be in trouble with a margin call, which always comes at the wrong time. The above are the basic guidelines I constantly refer to when investing. I try to buy only good quality stocks (which we all do, of course), many through dividend reinvestment plans (DRIPs), one of my favorite methods of investing. Most of my stock portfolio contains good, large-cap companies, such as General Electric (NYSE: GE), Home Depot (NYSE: HD) and Intel (Nasdaq: INTC) . I avoid penny stocks (anything under $1 a share); stocks over $5 a share are preferable to me. There are many stories out there about people who put a few hundred dollars in a stock and watched their investment soar to thousands of dollars. For most of us, that will never happen. However, we can make a good profit by becoming wise, long-term investors.
Some of you reading this will say, "Well this is all a lot of common sense!" You're right. I've made most of my decisions in life on that basis--conservatively and sensibly--and I found I've been successful in this approach.
I hope you'll join me in the coming months to talk about DRIPs, investing ideas for the newcomer (how to choose stocks, mutual funds), investment mistakes, and other topics. Please stop by my message board, The Woman Investor, to talk about this column and about how we can help each other become better, more-profitable investors.