Although getting your financial house in order (debt management, cash-flow, maximizing the value of your corporate benefits) comes first, investing is a critical component of any successful financial plan.
You: It’s also where I’d like to begin.
I’m not surprised. Personal financial planning magazines nearly always feature investing stories as their featured cover stories, so most peope want and feel that they must focus there first. But, once you’re ready to invest, it’s important to understand your risk profile and to state your goals for investing.
You: My goal is to make money.
You know, it goes a little deeper than that. For example, what are you investing for? Is this a 2-years from now goal (like a downpayment on a home) or a 30-years from now goal (like retirement)?
You: Can’t I just do what Cramer tells me to do?
Sure you can. But I wouldn’t recommend it.
You: Why not?
Gary: Yeah, why not? Cramer rocks. I get a lot of calls after each show!
Though Cramer’s clearly a smart guy (and even more clearly: entertaining), there are a bunch of reasons why it makes no sense for you to just follow his stock recommendations. Here are three:
- He knows nothing about you. He doesn’t know your income, the size of your investment portfolio, how it compares to your debt burden, or the amount (if it exists) of your emergency fund. Most importantly, he has no clue as to your risk tolerance. No one lacking that information could ever give you reasonable investment advice. This isn’t a knock on Cramer. Television is a one-way communication device.
- Cramer tells you not to simply follow his advice. During his own show, Cramer himself emphasizes the need for you to do your homework before actually investing. Will you really study the inner financial workings of the companies he discusses? Do you know what that means?
- Timing the market is a proven losing strategy. Whole books have been written on this topic, but for now just read this article which puts some numbers behind this statement. And it’s specific discussion about Cramer’s investment choices.
You: So I shouldn’t watch him? Then why are his ratings so high?
You should totally watch him if you enjoy the program. You’ll pick up a thing or two about how part of the investing world works. But if you want to invest your money, you’re far better off (after you get your financial house in order), establishing your risk tolerance and then pursuing a boring (but statistically speaking far more effective) buy and hold strategy.