It doesn’t matter whether it’s stocks, bonds, real estate, precious metals or any other investment – before you make a move, ask yourself these two questions:
What is your purpose (or goal)? In other words, why are you making this investment and what do you expect from it? This is a great way to cross-check your decision-making. For instance, are you are looking for a quick strike, to make 10% in the month or couple of months? If so, then buying Microsoft (MSFT) isn’t a good idea. It would take an earth shattering event to move the needle to the extent needed for a 10% pop in MSFT. But if your goal is a decent dividend with a chance for an OK gain in the next 6-12 months then MSFT might be the right choice for you.
It’s easy to get sucked in by the news of the day and buy stocks that are hot at the moment. If your goals are short term gain and you’re an active investor then that’s OK. But buying the “stock du jour” that is being touted on CNBC when your plan is to hold it in your IRA for the next 5 years that you pay attention to every 6 months is a recipe for disaster. In today’s world, a stock that is shining today could be a complete mess in just a couple of months.
What is the time frame? Ask yourself how soon you expect to be out of this particular investment. Lots of people (me included) invested in real estate six or seven years ago with the assumption that real estate would be much more of a liquid investment than it turned out to be. Those people who expected to be in and out of a real estate deal in 6 months or even 24 months found out the hard way that you need to put careful thought into your time frame.
The same thing applies to stocks or bonds – your time frame should play a major factor in your decision making. For example, you should treat your retirement portfolio much differently than your kid’s college fund. You may think that’s an oversimplification but I’ve seen people pack their kid’s college fund with high-flying speculative stocks and then be in utter shock when the kid’s portfolio takes a 30% haircut over a few weeks. That doesn’t mean you should forego stocks for a kid’s college fund, but that the stocks need to match the investment purpose.
Successful investing takes self-discipline and a big way to introduce that discipline into your investing is to keep in mind your purpose and timeline for each trade you make.