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Planning Your Financial Future
By: William J. Lynott
Posted: February 24, 2010, from the March 2010 issue of Skin Inc. magazine.
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“Creating a plan and sticking with it under all market conditions is the way to maximize your returns,” says Jordan Kimmel of Magnet Investing Group in New York. “One helpful technique in this regard is called dollar-cost-averaging—putting the same amount of money into equities or mutual funds at regular intervals regardless of swings in the market. That way, when prices are higher, you are buying fewer shares; when prices are lower, you are buying more shares. Dollar-cost-averaging is an effective way to minimize the effects of emotion in financial management.”
“It’s human nature to chase hot sectors that have already made a significant move,” says certified financial planner Greg Womack of Edmond, Oklahoma. “It’s also natural to panic and sell out when everyone else is doing the same. While it may seem natural, it’s not the smart thing to do. It’s important to have an investment strategy and stick to it. If it’s in the headlines and everyone else is doing it, you’re probably too late anyway.”
Never trade on margin
It seemed like such a wonderful idea, or so they thought back in 1929: Put up just a small percentage of the money you need to buy a hot stock and let your broker lend you the balance of the purchase price. Then, when the price goes up, sell the stock, pay off your loan from the broker and pocket the profit. With that kind of leverage, a rising stock market could make you rich beyond your dreams.
But what if the price of the stock goes down, in which case the broker may demand immediate payment of your loan? Now you have stock worth less than what you paid for it and a huge loan you must pay off. This is exactly what has happened throughout the years to more investors than you could count.
When you buy a stock and pay for it in full, the most you can possibly lose is your original investment, even if the price of the stock falls to zero, which is highly unlikely. When you buy on margin, your potential loss is literally unlimited—a scenario that has wreaked financial destruction for many an investor.