When Investing, Buy What You Know

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As an investor, you may, at times, feel overwhelmed when considering the vast universe of stocks. With so many companies out there, how can you know which ones to buy?

Of course, you can't expect to be familiar with every single stock on the market. But you can learn something about products that are popular -- and the companies that produce them -- just by looking around you.

A typical day

Let's see just what goods and services you might encounter on a typical day. In the morning, you get up and head to the bathroom. You wash your hair using using shampoo made by Johnson & Johnson. Afterward, you eat breakfast and take your daily vitamins. Also, if you have medical issues, such as cholesterol, you may take your Lipitor, which is produced by Pfizer.

Before arriving at work, you stop for a cup of coffee at Starbucks. Once you arrive at your office, you turn on your Dell computer and get going on your daily tasks. But, after a while, you take a break, visit the vending machines and select a box of Good & Plenty, produced by Hershey Foods.

At lunchtime, you quickly eat a sandwich and wash it down with a soft drink made by PepsiCo. Then, you're off to run an errand. First, you stop at a cash machine operated by Bank of America. Next, you call your spouse on your Nokia cell phone to find out what type of school supplies you are supposed to pick up for your child, after which you zip off to the nearest Walgreens.

Back at work, you return some calls, relying on technology provided by SBC Communications. Before you know it, the day is over, and you're headed home. On the way, you stop for gas at your neighborhood Mobil, part of Exxon Mobil. Then, you remember that you need to pick up your window blinds, so you drive to Home Depot.

At home that evening, you decide to wash some clothes, so you reach for the Clorox. Later, you and your spouse visit a local home furnishings store to look at furniture, manufactured by Leggett & Platt.

Look beyond your experience

The number of everyday items we just ran through on your "typical'' day only represent a small fraction of the businesses producing the goods and services you actually use in any 24-hour period. So, when you're thinking of what stocks to invest in, look at all the products and services you use. And don't stop there. Observe what's popular at local stores. Ask your friends and family what they buy. In short, take in as much first-hand knowledge as you can.

In evaluating stocks, your observations and experience can be important -- but don't rely solely on them. Many of the stocks you encounter on a daily basis may not even be appropriate for you. That's why you should consult with a financial professional -- someone with access to expert opinions on the stocks that you might be considering. These outside analyses can confirm your own views, or, perhaps, point out some factors that may cause you to reconsider your original assessment.

Furthermore, an investment professional can help you look beyond the internal characteristics of a stock to determine if it fits in with your overall portfolio. Will it add to your diversification? How will it affect your risk level? Can it actually help you meet your long-term objectives? In short, does it meet your needs?

When you invest, keep this rule in mind: Buy what you know -- and know what you're buying. By following this basic guideline, you'll help yourself avoid a lot of "wrong turns'' in the future.

Ross Hage is a licensed financial adviser with the firm of Edward Jones. For more information, call him at (928) 468-2281.

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