Each year investors are inundated with the idea of owning the next “hot” investment. Earlier this year, the Facebook IPO garnered a lot of attention from the financial media. The question just about every investor wanted to know was whether or not Facebook would be a good investment. Depending on where you access investment information, you could have found both proponents and opponents of owning Facebook stock. So who were you to believe? My answer is always the same – I don’t know. It seems that just about every investor wants to focus on the one thing that is not controllable in investing – performance. If anyone knew for certain that a particular investment would increase or decrease in value, chances are they would not let that information become public. So the bigger question becomes: Does that hot investment actually fit into my investment plan?
Each investment in your portfolio should have a purpose. To get the outcome you want, you need a sound reason for each piece of your investment pie. And it shouldn’t be because you heard someone talking about it on TV, read about it in a magazine, or a family member swears by it. If one follows this type of behavior to accumulate an investment portfolio they have become a collector instead of an investor. With the result most likely being a hodge-podge of stocks, mutual funds and bonds that do not complement one another.
Instead, investors should focus their time and energy on creating an investment plan that meets their specific goals. A plan that focuses on variables that are controllable such as the amount of risk you take, how much it costs to invest, and how much you pay in taxes. In other words, make investment decisions based on what is best for you, not because it is this year’s hot investment.