Not too long ago, I met a client at the bank who doesn't have a nine-to-five job. He stays at home all day, logs onto his computer, and watches his stock portfolio.
I asked him: 'How do you do it?'
What did he say?
Just this: Investing in the stock market is actually not as complicated as people think. He also told me that he inherited his investment strategies from his other money-making hobby: playing poker.
That's right. This 22-year-old former college student started playing poker as a way to make friends, and now he makes his living from it -- a very good living I might add.
Naturally, my next question was: 'What does a 22-year-old college dropout know about day trading stock?'
Here are his three investing rules to live by:
1. Don't Take A Tip From A Friend.
As a financial planner, one of the biggest mistakes I see clients make is investing in a particular stock because they received a tip from a friend. If financial planners don't know how a certain stock is going to perform, trust me, neither does your friendly neighbor.
2. Always Research Your Choice.
Before putting your money in any investment -- including stock -- you should know what you are getting into. Look at the stock information on websites such as Yahoo Finance. Although past performance is not an indication of future potential, it can help determine if you are comfortable with the potential fluctuations and other information such as the dividend payout.
3. Don't Buy Or Sell On An Impulse.
Making purchases on an impulse is never a good idea. From stocks to bubble gum and everything in between, impulse purchases are almost always a mistake because you usually end up wishing that you hadn't spent the money. I like to invest in stocks of companies whose products I like, such as The Walt Disney Company (NYSE: DIS) and Coca-Cola (NYSE: KO).
I also try to invest in companies that have been around for at least 25 years because it gives me peace of mind that they will be around for another 25 years. It may not be true, but a major part of investing has to do with our comfort level in the investments that we buy.
The Investing Answer: Stocks can be an important aspect of your well-diversified investment portfolio. If you want to start investing in stocks, it's a good idea to set up a fantasy portfolio with a website such as Wall Street Investor and watch the stocks over a period of time. If you are comfortable with the fluctuations and level of risk, then start investing. But just in case you're not comfortable with the level of risk versus return, it's a lot better to lose fantasy money than your own money.
