Some investors wonder if it makes sense for them to invest in a company because they like the products or services it offers. This question sometimes stems from their familiarity with the famous investment principle of legendary fund manager Peter Lynch, which is, "Invest in what you know."
The answer? It depends. Although it can be fun and interesting to track the ups and downs of a company that makes or provides something you love, it is not necessarily wise to put your money in that company's stock. Choosing where to invest can be complicated and when you consider investing in a specific stock, there are several factors to consider.
First, it is a good idea to know whether the company has solid financials, good leadership, and enough new products or services on the horizon to remain competitive. Be prepared to invest some time getting answers to these questions because it may involve looking at analyst reports and company quarterly and annual earnings releases.
It may be helpful to track the stock you consider for a period of time to see how wildly it may swing or if it is fairly steady. While it may match the ups and downs of the S&P 500, dig into any other factors that might cause that specific company's stock to rise or fall. For example, perhaps one of the supplies used to make the company's most popular product can be in short supply based on agricultural patterns or transportation barriers. Be cautious if these types of hiccups appear to happen frequently and impact the company's stock negatively.
If the outcome of your research is favorable, it still does not mean the stock is necessarily a good buy. You should also know how the company's stock price compares to the company's future earnings. For example, does the stock appear to be low or high?
In addition, you should assess whether or not that stock is a good fit for your overall portfolio. For example, determine if this particular stock will contribute to the diversification of your portfolio, which may help you better weather the market's ups and downs. Diversification involves having the right blend of stocks, bonds, mutual funds, and/or CDs to help provide for more consistent performance under a wide range of economic conditions.
As an alternative, you can look at whether the company's stock is part of a mutual fund, which will give you some ownership in the company while helping to reduce your risk exposure. Again, you want to make sure that the investment you select is in line with your goals, risk tolerance, and time horizon.
Because of the amount of time it can take to weed though all this information and the level of industry knowledge required to understand it, consider working with a financial professional to discuss your interests before your invest. He or she can help you identify the merits of such an investment and how it fits into your overall financial strategy.
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Diversification helps you spread risk throughout your portfolio, so investments that do poorly may be balanced by others that do relatively better. Diversification does not assure a profit and does not protect against loss in declining markets.
Investment products, including shares of mutual funds, are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
This communication is published in the United States for Texas only; and this advisor is licensed only in the states of CA, CO, FL, KS, MO, NC, NM, OK, TX, and VA.
M. Ahmad Adnan, CFP®, CRPC®, RFC®
Business Financial Advisor
Ameriprise Financial Services, Inc.
3200 Steck Avenue | Suite 250 | Austin, TX 78757
Phone: 512.213.6400 Ext. 102 | Toll Free: 866.238.4230
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