If you had $1,000 (or less) to invest anywhere you wanted, what would you do with it?
That's a question that's pretty common these days, since the stock market seems to be on everyone's mind. As well it should be. Recently, the market's not been a friendly place for new or seasoned investors, slashing the value of most peoples' portfolios.
Despite the way the market's been moving, there are still investment moves to be made and gains to be had. If you would have put money in
on Friday, you'd be sitting on 20% gains. Investing in
General Growth Properties
the same day would have brought you almost 30%. There's certainly money to be made in this market, but only if you avoid the pitfalls many new investors face.
"Playing $1K" is something that I had the chance to do myself when I was a new investor at just 18 years old. As crazy as it sounds, I had been following the stock market since I was 11 years old, learning and "paper-trading" for some decent gains along the way. I was obsessed with knowing everything I could about investing. And when I really wanted to learn something, I didn't pick up one of the "get rich quick in the market" books. Instead, I got a copy of the
NASD Series 6 Exam Guide
So when I turned 18, I got a gift I didn't expect: a $1,000 check from my grandparents to invest as I saw fit. At the time, $1,000 was probably the largest amount of money I'd ever gotten at once, so seeing that number was no small shock.
Here I was with a grand in hand realizing that I had to actually figure out where to
Luckily, I had already been looking at a stock I thought would do pretty well -
(now a subsidiary of
), so I was ready to trade as soon as my
was ready to go. "Nothing could go wrong," I thought. I'd been doing this for years on paper -- picking stocks and watching their prices rocket up -- and I simply didn't see failure as an option. My investment was bound to make money.
And it did. By the time I sold the stock just one year later, I had already realized gains of 140%. Not to shabby for my
. But that's not to say there weren't plenty of mistakes made along the way.
My biggest blunder with Lexar was quantity. Not wanting to put all of my eggs in one basket, I only bought 20 shares of the $3.76 stock, bringing my cost basis to $82 after commissions. Not exactly a big chunk of my $1,000. It also meant that to break even after commissions, I'd have to make 8.5% on Lexar. Ouch.
The worst thing was the fact that I really had faith in this company. There was no reason for me to be that cautious with Lexar, and in the end I paid the price by missing out on a potential windfall.
Downside of diversification.
Another mistake was too much variety in my portfolio. This problem was a result of the small positions I was taking -- $82 here, $120 there. Diversification's great when you're planning for retirement and want to protect your assets. It's a bad strategy when you're a teenager looking for high-risk high-reward stock plays.
Fixing for the Future
If my story tells you anything, it should be to think carefully about the size of your positions and the strategy you undertake. When you buy small quantities of stock, you're basically handicapping yourself because you'll need higher returns just to break even. While 8.5% makes for a decent return for most, 8.5% would have left me with zero profits.
The same is true of knowing your strategy. Diversification isn't a good move if you're a teenager who wants to play some risky stocks for big gains; it limits your upside potential. Likewise, putting all of your eggs in one basket is a very bad move if you're planning your retirement.
The lesson here: Use a strategy that's tailored to
, not the other way around.
Cramer: Strategy for Young Adults (Video, Sept. 30)
If you have a longer time horizon, here are your opportunities, says Jim Cramer.
To watch the video, click the player below:
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I did do one thing very well in all of this: I knew what I owned. Even though I made some mistakes in the
of my investment, investing in Lexar was a very good move that made impressive returns. I looked at the stock on its merits, not on its hype. It had strong
, so I pulled the trigger. If I my first trade had not been based on that sound analysis, I'd probably have a few more mistakes to tell you about.
It would have been easy for me to call my 140% gain a success and leave it at that. Most fund
don't have plays that good. But if I stopped there and threw away a chance to learn from my mistakes, that probably would have cost me some serious money in the trades that followed.
In the end, that $82 stake in Lexar Media turned out to be a pretty big investment in my stock market education.
In today's tumultuous market, the lessons are harder and more costly for new investors, but that doesn't mean there aren't of opportunities. (Don't miss
Siegel: Stocks Still a Good Long-Term Bet
Jonas Elmerraji is the founder and publisher of Growfolio.com, an online business magazine for young investors.