How to Avoid Losing Money on Bad Investments

Whether you are a first-time investor or a savvy investment guru, know that mistakes happen. The key to avoiding mishaps is to keep on top of investment rules, tax codes and annual reports.

Instructions

• STEP 1: Study. Read financial news, personal-finance magazines, corporate annual and quarterly reports, proxy statements, registration statements and prospectuses.
• STEP 2: Develop goals and strategies for meeting your goals and for picking stocks and other investments. Ask for professional advice in these areas if you are uncomfortable.
• STEP 3: Diversify. Avoid putting large portions of your portfolio in a single stock or industry.
• STEP 4: Take advantage of tax breaks. Your employer might offer a 401(k) plan. If not, you might be able to set up an Individual Retirement Account or, for self-employed people, a Keogh plan.
• STEP 5: Buy stocks that you will want to keep for three to five years. Remember that "good" stocks at unrealistically high prices are a bad buy.
• STEP 6: Invest in what you know. Conversely, avoid buying stocks in industries and companies with which you are unfamiliar.
• STEP 7: Shop for total value. That means learning to calculate key financial figures such as price-earnings ratios so that you can compare one stock with others.
• STEP 8: Resist fads. If everyone is buying gold, variable annuities or some other faddish investment, watch out. The herd soon will change direction.
• STEP 9: Know when to fold. Your objective may be to hold a particular stock or mutual fund for three to five years, but if it appears to be on terminal descent, bail out.

Tips & Warnings

• Know your appetite for risk. Kiplinger's Personal Finance Web site offers a quiz that will help you gauge how much risk you can tolerate.
• Avoid putting all your money in individual stocks. Consider mutual funds, bonds, money market accounts and other instruments as well.