Never buy stocks because someone tipped you to do so

Many people become interested in stocks, jump in and get burnt. Then they never come back to the market. Just like a cat that jumps up on a stove and gets singed, the once-burnt investor is likely never to try that manoeuvre ever again.

So how does a novice investor get started without risking a nasty surprise?

Start by buying a portfolio of stocks from the outset, as diversification is key to minimising risk.

Firstly, here are three things not to do when you start off.

1. Never buy because someone tipped you to do so.

2. Never buy because someone tipped you to do so.

3. Never buy because someone tipped you to do so.

I hope those three rules are very clear!

Here are four more things not to do when you get started.

1. Never buy so much of any one stock that you will care if you made a mistake buying it.

2. Never buy stock in the firm you work for. (It’s already paying you)

3. Don’t buy anything small and obscure.

4. Don’t buy anything controversial.

You can, of course, dabble with all these kinds of riskier stocks in a few years, but like a new motorbike driver, do not get on a 1000c superbike your first time or you will end up at the crematorium rather than your desired destination.

I will assume you have enough to buy 12 stocks to start your portfolio. You should aim to build up to 30 over time, but we will start with 12.

Select:

- Three ‘slightly risky’ stocks. Nice company, nice product, you like the story but there is an element of excitement that should warn you, it’s not going to be a totally smooth ride.

- Three ‘un-risky’ stocks. Nothing is going to go wrong for these companies in the next five years

- Three ‘safe’ stocks. These stocks have been going forever and even a fool could own them and do OK.

- Three ‘very safe’ stocks . These stocks are so boring you find it almost impossible to bother buying them.

These 12 stocks should not be in the same sectors. They should be in different businesses and look like a hotchpotch. This diversity of type and risk will mean you will be protected to a great degree from beginners’ mistakes. As you watch your stocks from day to day you will learn a lot. One you though was boring may turn out exciting whilst your best pick could be a dud.

Those without enough cash to buy 12 stocks will need to start out small and add new companies to the mix while embracing the fact that disaster or great profits are all a matter of blind luck until you have built up your portfolio to 10 to 20 stocks. This is a tough call, because it’s hard to believe in probability and diversification until you see it working in practice.

Your portfolio will give you breathing space to invest, learn and grow, whereas trying to swim in the big bad ocean of the global stock exchanges as a hatchling, is a recipe to add yourself to the rolls of the short lifespan traders that bloom and disappear with the boom and bust of the stock market cycle.

Oh yes, and by the way, remember…never buy a stock because someone tipped you to do so.