There’s no real secret to managing your money wisely. With a little discipline, you can protect your money and maximize its growth by
sticking to a few basic investment principles. Here are the most important.
- Never invest in anything you don’t understand. You wouldn’t buy a book written in a strange language and you shouldn’t put your money in anything you don’t understand completely. If you don’t know all the details about what your money is buying, look elsewhere.
- Don’t make snap judgments. Just because your brother-in-law made a fast profit on a new high-tech stock doesn’t mean it’s for you. Your situation and your risk tolerance are unique. Think before you invest.
- Diversify. It’s a common money management mistake to put all your funds in one place. You can substantially reduce your risk and improve your profit potential by dividing your money among fixed income investments, equities, and cash. Always diversify, no matter how much money you have to invest.
- Be patient. Don’t buy stocks or mutual funds and expect big profits in a few months. It often takes years for an equity investment to pay off. Buying and selling stocks over the short term is almost always bad money management.
- Don’t invest just to save taxes. You might save taxes but wind up losing money. Tax-free investments invariably pay less than other investments. Consider your total after-tax return before you invest.
- When you make a profit, take it. If you buy a stock, pick a price at which you’ll make a satisfactory profit. When the stock reaches that price, sell. Remember, stocks go down as well as up and there’s no guarantee that a rising stock will continue to go up.
- Ignore hot tips. They’re almost always wrong no matter how convincing or well-meaning your source is.
- Always keep track of your investments. Monitor your investments at least once a month. It only takes a few minutes to look in the newspaper or call your broker. Unpleasant surprises should be and can be avoided.
- Read the fine print. CDs carry a substantial penalty for early withdrawal. High money market interest rates may apply only for the first few months your money is invested. A And there’s a big difference between interest rates and effective annual yield.