Buying a Stock Is Like Adopting a Pet

A puppy under the Christmas tree might provide priceless footage for your family video archives, but after Fido's small-screen debut comes the real payoff -- or letdown.

An article from a local animal shelter newsletter included a few tips for families considering adopting a pet. The same questions are good ones to ask before you commit to an investment (though the consequences of unwisely purchasing a stock are less lethal and tragic):

1. What can you afford? Puppies require upkeep -- food, medical care, toys to destroy. With investments, the financial maintenance comes in the form of fees. If you have a lump sum to invest, keeping fees to less than 1.5% of your assets is pretty simple with a discount brokerage account or a low-fee mutual fund. If you have small amounts of cash to invest on a regular basis, dividend reinvestment plans (Drips) are cost-effective.

2. How much time are you willing to devote? Puppies require daily nurturing. So, too, do individual stocks (although you can skip the regular brushing). If you're going to take some stocks under your wing, you'll need to commit to regular check-ins (maybe not daily, but at least monthly). Are you or someone in your family willing to think of this as a hobby, if not part of your regular financial routine?

3. How might your situation change in the short, medium, or long term? Things like moving, marriage, and having a baby can have a profound effect on the family pet. Same goes for one's finances. Moving, marriage, and the birth of a child, for example, require emotional and financial resources, not to mention a bit of planning. Because of the stock market's short-term volatility, a good rule of thumb is to keep any cash you know you'll need in the next five years (or 10 if you're a nervous Nellie) in more stable financial vehicles, such as CDs, money market accounts, or even a high-yield checking account.

4. What if things don't go exactly as planned? One mangled Manolo is excusable. Three pairs, and someone's gonna get a good talkin'-to. After a few trips to PetSmart (Nasdaq: PETM  ) for some appropriate chew toys, you may feel like giving up. You're not alone. Research shows that even the most well-adjusted investors fall victim to money mind games (here are six). Before you let a bad investment (or destructive puppy) sour you on the whole shebang, channel your money chi. If that doesn't work, there's always group therapy.

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This article has been updated and originally ran on Nov. 17, 2005. Dayana Yochim owns no stock in any company mentioned here. She got her Poesy, who is no longer a puppy, from theHomeless Animals Rescue Team(HART) in Fairfax Station, Virginia.


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