Investing “For Fun”
After sixteen years guiding individuals, families, and business investment strategies, I’ve discovered some investors think it makes sense for them to invest in a company because they like the products or services it offers.
This thought often stems from their familiarity with the famous investment principle of legendary fund manager, Peter Lynch. Lynch advised to “Invest in what you know,” and doing so may make sense. After all, it can be fun and interesting to track the ups and downs of a company that makes or provides something you love.
However, putting your money on the line isn’t necessarily the wisest move. No matter how much you think you know about a hobby, sport, product, or service, there are always factors that can blindside all but the most professional of investors and potentially put your savings at risk.
Choosing where to invest can be complicated under the best of circumstances. Consider these factors if you’re considering investing in a specific stock:
- Know whether the company has solid financials, good leadership and enough new products or services on the horizon to remain competitive.
This means you should be prepared to invest some serious research time getting answers to these types of questions. This may involve reading stacks of analyst reports, press releases, competitors’ annual reports, industry assessments, personnel resumes, and both company quarterly and annual earnings releases. You’ll also want to understand long-term objectives, marketing strategies, means of manufacturing and distribution, operations, pension obligations, and so forth.
- Track the stock you’re considering for a period of time to see if it swings wildly or remains steady. Also consider tracking it backwards for six months to determine the historical track record.
Furthermore, while the gyrations of the company you’re interested in may match the S&P 500’s ups and downs, you should also dig into other factors that might cause this specific firm’s stock to rise or fall. For example, how are suppliers of their raw materials impacted by commodity market reactions to world events? And do tightening credit or fuel supplies affect this company’s ability to develop new products or finance adequate inventory?
- Next, assess whether that stock is a good fit for your overall portfolio. Will it contribute to the diversification of your portfolio so you can better weather the market’s ups and downs? Always remember that diversification involves the right blend of stocks, bonds, mutual funds, and CDs to help provide more consistent performance under a wide range of economic conditions.
Of course you can try to buy the company’s stock as part of a well-diversified mutual fund. This will give you some ownership in the company while helping reduce your risk exposure. Again, ensure all your investments are in line with your goals, risk tolerance and time horizon.
Bottom line: Because of the amount of time it can take to find, weed through, and understand all this information about both a single stock and the high level of industry knowledge required to make adequate use of it, consider working with a financial professional to discuss your interests before you invest. He or she can help you identify the merits of such an investment and how it fits into your overall financial strategy.
With 16 years of providing comprehensive fee-based financial, investment, retirement and estate planning, Richard Fogg and his team know clients value their unique approach, experienced advice and the outstanding level of personal service provided. Based in Carmel Valley, the Fogg team is appreciated by clients for bringing experience and integrity to help them achieve their hopes, dreams and aspirations.
Fogg & Associates is an Ameriprise Platinum Financial Services® practice of Ameriprise Financial Services, Inc.
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