As a rule of thumb, you should be investing at least 10 percent of your income in your 401(k) so you have enough for retirement.
Then, if you want to use a little play money to invest in stocks on the side, go for it. But do it thoughtfully.
There is safety in numbers, and you have a better chance of winning with 100 stocks than one or two.
Professional stock pickers who work for mutual fund companies generally set what are called price targets when they pick a stock. They analyze all the factors that they think will drive profit, and then estimate where the stock price should go. They promise themselves to sell the stock when it reaches that point.
When that time arrives, they will re-examine their analysis of the stock and see if there is new information that suggests profit will be greater than they thought. If so, they will raise their price target and hold on.
Sometimes even they succumb to wishful thinking when stocks perform badly. They set up disciplines, like noting profit assumptions, to fight the urge to trick themselves.
If you are serious about picking stocks, learn to do this analysis. Although you often hear about stocks that are so strong you can buy and hold them for life, you must continually revisit your analysis and see if the reason for holding the stock remains sound.
Even solid stocks often lose their luster.
The Leuthold Group recently researched how stocks hold up over time.
They reviewed the 100 largest stocks of 1966, or the equivalent of such stocks as Exxon Mobil, General Electric and Microsoft today. Only 23 of those companies from 1966 remain on the list of the largest 100 stocks.
The next time you want to buy a hot stock and figure it will be as good as gold for life, consider Polaroid. It was a hot stock in the early '70s. A few years ago, it filed for bankruptcy, leaving shareholders high and dry.
Gail MarksJarvis is a Your Money columnist. Contact her firstname.lastname@example.org.