PWL Capital October 26, 2016 Starting Out What Stock Should I Buy? It’s almost inevitable. Pretty much every time I meet people for the first time and they find out that I’m an Associate Portfolio Manager, they ask: “What stock should I buy?” And every time I get this question, I answer: “That’s the wrong question!” I’m going to tell exactly why you should never ask this question and if you do, why you shouldn’t trust anyone who answers it. Seriously. Having a single answer to the question “What stock should I buy” would be outrageous! Even if I DID recommend individual stocks to clients (which I don’t), I couldn’t do it. Everyone has such different needs, goals, and situations, and therefore, everyone needs a different investment strategy. The purpose of investing is to earn a return on your money so you can achieve your goals. Without knowing what your goals are, and when you want to achieve them by, I have NO idea what is appropriate for you. And, in fact, it’s quite possible that you shouldn’t be invested in ANY stocks. If you’re looking to buy a house in 6 months, you’d be taking a BIG risk investing in stocks, especially just one! Or maybe you have lots of debt, no emergency fund, and shouldn’t be investing at all. So what is the right question? Well, there are many that need to be answered before getting to the point where an overall investment strategy should even be created. Here are a few to start: What are you investing for? How much money do you need? How much money do you currently have and how much can you save? When do you want to achieve your goal/when do you need the money? Are there other things that should take priority before trying to achieve your goal, like paying down debt, starting an emergency fund, creating a budget? Here are 5 steps you should take before even thinking about actual investments: Create a budget. Budgets sound scary, but they don’t have to be complex. It’s important to have an idea of what your basic needs are…rent or mortgage payments, food costs, transportation expense, and personal expenses. Get insurance. If you’re young, disability insurance is very important. Life insurance becomes really important when you’re married with kids. Make sure you have appropriate coverage, otherwise not much else will matter with respect to your finances if you die or become disabled. Create an emergency fund. If you’re laid off, need car repairs, or are a homeowner and something breaks, can you pay for that without going into debt? You should have at least 3 to 6 month’s worth of expenses saved in safe, liquid investments. Pay off your debts. Before you do any investing you need to assess your debts and create a plan to pay them off. High rate consumer debt especially needs to be addressed before investing should be considered. Determine what you are saving for, how much you will need, and when you need the money by. Once that is determined you can decide if cash should be invested in the market, or left as accessible cash. Only after the above have been considered should you start developing an investment strategy. This will include things like the return required, risks you’re willing to take, what investment philosophy you will invest according to (active or passive). Once that’s been determined, the securities you should buy will fall into place. So which stock should you buy? Now you know better. Share: Facebook Twitter LinkedIn Email