Demystifying the Market
Karen's decision to follow just one stock stemmed from a desire to learn what to focus on—how to narrow down the information and study the gap between actual events and investors' expectations. She says it's important for everyone to understand how the market moves for the sake of your own investments, as well as to understand what your financial planner or adviser is doing with your investments.
While investing can be very rewarding, Karen says you'll fare even better if you research companies you're interested in. There is a lot of information accessible to investors today, from annual reports to conference calls to online transcripts. Financial websites can also provide information with a more objective view. Some companies have investor relations departments that will answer some questions, Karen says, but the average person can't get the same level of information that a professional investor can.
For those just starting on a stock portfolio, Karen offers the following advice:
- Start with mutual funds so you're covering the basics of the regular stock market.
- Invest up to 25 percent of your net worth (50 percent if you're really confident) in individual stocks.
- Karen estimates that 10 to 12 stocks is the maximum an average person can realistically follow and still be productive, unless you're willing to invest a lot of time in the market.
- If you own stock in the company you work for, make it no more than 15 to 20 percent of your portfolio. It can be a good deal, Karen says, but it can also backfire, as in the case of Enron.