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Chapter 7. Equity Investments: Taking St... > Individual Stocks and Goal-Oriented ...

Individual Stocks and Goal-Oriented Financial Planning

I have already laid out the cautionary issues you need to take into account when you decide to buy individual stocks. I understand you may still really need to feel directly connected to the market, and I know that at cocktail parties it's nice to be able to say, “Yeah, I bought that stock when it was selling for $3.50 a share.” So let's look at how we can manage a portfolio of individual stocks as part of our investment strategy and tie it to specific objectives. Here's a checklist to help guide your decisions:

  • Limit your individual stock exposure to not more than 10 percent of your portfolio, and make certain that you have good overall diversification.

  • Try to avoid small-cap and micro-cap stocks altogether; you're better advised to pick those up in a mutual fund.

  • Be careful of tips from a friend. In today's information age, it's hard to find new news. If you want to use the tip to research a company and that company meets your screens and needs, consider taking a flyer.

  • Use “limit orders” to lock in gains or minimize losses. Remember that pigs get fat and hogs get slaughtered.

  • Be thinking about the tax consequences of your investments. If you're buying individual stocks, you have better control over taxes than in a mutual fund. With that in mind, it may be better for you to keep your individual stock investments outside qualified plans.

  • When we get to assigning assets to goals later in the book you'll see that individual investments are best suited to mid- to long-term goals.



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