Before you're ready to buy stocks, it's best to check off these keys to putting your financial house in order: get out of debt, establish a rainy-day fund, and open or add to a 401(k) plan and/or IRA. Then it might be time to think about investing in stocks, but only with money you absolutely won't need in three, five, ten, or more years. Even then, an index fund might be right for you, rather than individual stocks.
If you've already jumped those hurdles, the next step is to acquire the traits that go with being a successful investor, ranging from knowing when not to invest to learning what emotions can get in the way of making rational investing decisions. Do you have the three Ts: time, training, and temperament?
"When NOT to Invest," (scroll to bottom of page) by Randy Befumo
Randy Befumo gives 20 dead-on criteria for when you're not ready to invest. Just by identifying each one, he gives the answer for how to remedy it, too. A Motley Fool classic!
"Traits of Successful Money Managers," by Whitney Tilson
Successful long-term money managers, Whitney Tilson says, share 16 traits, divided equally between personal characteristics and professional habits. Understanding these traits not only helps you identify exemplary professional money managers, but may also help you understand how you stack up as an individual investor. And in another column, "The Arrogance of Stock Picking," Whitney endorses stock investing only for people with realistic expectations, and who have the three T's: time, training, and temperament.
Do you have to buy a stock right this minute?
"Don't Buy That Stock!" by Paul Commins (TMF Buster)
Our daily lives are ruled by the concept of the null hypothesis. A lot of people miss it, but our basic decision-making rules in law and science are strongly biased toward safe choices, where "safe" is defined in the context of some fundamental, widely shared beliefs. Rule Breaker investing has its own null hypothesis: Don't Buy It. As in the broader case, this decision-making rule protects us, is strongly aligned with some core Foolish beliefs, and is widely misunderstood.
How to keep emotions out of investing
"The Danger of Investor Overconfidence," by Whitney Tilson
Behavioral finance examines how people's emotions affect their investment decisions and performance. Here are 20 common mistakes investors make because they let the irrational into their investing decisions.
"Four Economics Concepts You Should Know," by Richard McCaffery (TMF Gibson)
The new science of behavioral economics is growing, but investors also need an understanding of basic traditional economic concepts such as opportunity cost, rational decision-making, and the cost of information. Traditional economics gives investors powerful tools for understanding how people make buying choices.
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