How to Avoid Losing Money on Bad Investments

Step1
Study. Read financial news, personal-finance magazines, corporate annual and quarterly reports, proxy statements, registration statements and prospectuses.

Step2
Develop goals and strategies for meeting your goals and for picking stocks and other investments. Ask for professional advice in these areas if you are uncomfortable.

Step3
Diversify. Avoid putting large portions of your portfolio in a single stock or industry.

Step4
Take advantage of tax breaks. Your employer might offer a 401(k) plan. If not, you might be able to set up an Individual Retirement Account or, for self-employed people, a Keogh plan.

Step5
Buy stocks that you will want to keep for three to five years. Remember that "good" stocks at unrealistically high prices are a bad buy.

Step6
Invest in what you know. Conversely, avoid buying stocks in industries and companies with which you are unfamiliar.

Step7
Shop for total value. That means learning to calculate key financial figures such as price-earnings ratios so that you can compare one stock with others.

Step8
Resist fads. If everyone is buying gold, variable annuities or some other faddish investment, watch out. The herd soon will change direction.

Step9
Know when to fold. Your objective may be to hold a particular stock or mutual fund for three to five years, but if it appears to be on terminal descent, bail out.

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