Sentimental Investing — Investing in What You Know
It is often stated by investment experts that you should invest with your head and not by emotion alone. However, I think that this guideline can be misleading for the average investor. It can be a daunting task to research and choose a portfolio of individual stocks. Therefore, for most people, investing in diversified index funds, whether ETFs or mutual funds, is the best course of action.
What, then, is the individual investor, without the resources or financial expertise of someone like Warren Buffet, supposed to do? The answer is simple, invest in what you know. As an average consumer, you yourself probably have a good sense of what companies are stable and have an advantage over their competitors. Investing in a portfolio of stocks from companies whose products and services you use and trust is a good way to invest in individual stocks without the need for sophisticated stock market analysis or research to pick individual stocks.
When you are investing sentimentally, or in companies you know, you have the opportunity to invest in the companies and industries you care about the most. This is not to say that you should do no research whatsoever; you should still do a cursory examination of the company to make sure that the company is in good financial shape. You should also make sure that you do not put all of your eggs in one basket by investing in only one company. I suggest a minimum of ten individual stocks from various industries and market sectors, to make sure that your sentimental portfolio is well diversified.
Once you have selected your sentimental stock picks, be prepared to buy and hold them for the long term. I highly recommend that you do not engage in day trading or buying and selling stocks in an attempt to time the market. The best practice with your sentimental stock picks is to buy and hold them for the long term, reinvesting your dividends, and buying additional shares of each stock on a regular basis. This allows your portfolio to grow in the long term and take advantage of the stability and profitability of the strongest companies in which you invest.
It is important to remember that investing should also be fun. Yes, use your head, and invest wisely. But do not be afraid to research and invest in companies whose industries, products, and services you care about the most. It is fun to say that you own a piece of your favorite companies. And if this encourages you to invest more frequently and more consistently, so much the better!
