Question: I have no experience in the stock market, and I'd like to invest some of my money, but I do not have a clue how to go about it. Can you help me or tell me what to do before I make a move that may ruin my life?
Answer: I don't know if I can deal with all the issues that might ruin your life -- but let's look at the financial issues.
If you haven't been involved in the stock market, ask yourself how much can you afford to lose, both financially and temperamentally. Yes, I did say lose. The brokerage community usually asks, ``How much do you want to make?'' A silly question, don't you think?
I know I have no limit to the amount I am willing to make. ``Two million, not a penny more,'' you may say. I don't think so.
After you have decided that you are willing to accept the risk of loss, and how much you are willing to risk (even prudent investment has risk), I would advise starting slowly.
If you have a few thousand dollars to invest, consider starting with a diversified mutual fund, perhaps Vanguard S&P 500 Index or Vanguard US Growth (VWUSX). There are dozens of high quality, no-load funds that invest in larger company stocks. I would avoid individual stocks as they increase both your risk and your potential for reward -- not a prescription for a beginner.
Give your investment some time. Don't invest in equities with the intention to pull the money in weeks, months or even less than five years.
When you're more comfortable with the ups and downs of the market, then you can consider increasing your investments and broadening their diversification, again consistent with your risk tolerance.
The worst luck a beginner can have is making a lot of money right away. After that happens, many decide that investments are guarantees, and they invest all they have.
So my advice to you is to invest a little that you can afford to lose. Watch the ups and downs of the market and become comfortable with the volatility while at the same time increase your knowledge in available investment choices and risks.
Over time, you should have a diverse portfolio of mutual funds consistent with your goals, objectives, risk tolerance and tax situation.
Gary Schatsky is Chairman of the National Association of Personal Financial Advisors (NAPFA). NAPFA, www.napfa.org, is a national organization that represents fee-only financial advisors. He lectures nationally on topics such as personal finance, investment planning, tax planning and estate planning. Visit his Web site at www.objectiveadvice.com.