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As equities are down by about 15% in the past two months, as measured by the benchmark S&P 500 Index, individual investors have the chance to buy some of the greatest U.S. companies at a discount. That is, if they think the stock market will recover. Professional investors including hedge fund managers and mutual fund managers are worried about
slowing U.S. economic growth, Europe's massive debt woes and the dysfunction in American politics.
So what's an investor to do? Here's how you can become a better investor:
1. Have a Strategy: This might seem obvious, but too many investors select stocks haphazardly. Whether you're a short-term trader or a five-year investor, set a plan and stick to it. Some of my biggest investing mistakes came from selling a stock prematurely because I heard a rumor that was ultimately unfounded.
Consider an investment in a stock for what it really is: a stake in a business. Given that, what's the basis for investing in this company? What are the catalysts that may propel the share price higher? What could go wrong? And will I sell if these things happen? Some other questions are: What's my timeframe for holding the stock? How much money do I want to make on this investment?
2. Don't Ignore Economic Events: You might think you're holding the next
Apple in your portfolio, but if Greece or another country in Europe defaults, your stock is likely to fall regardless of its prospects. For many, this might be challenging to understand, but with investing comes the threat of financial contagion.
Contagion is typically caused by the default of a large bank and. When it happens, diversification is less effective. Contagion (you can think of it like catching a cold) is a concern now in that problems in Greece are likely to spread and hurt other European companies. The worry is that the U.S. gets sick and puts the final nail in the coffin for an already struggling economy.