Six Rules for the Small Investor

1. Pay Yourself First.  Out of each paycheck, keep some amount. Pay yourself before you pay the landlord, the butcher and the baker. Make it a habit or you may not do it at all. No matter how small the amount, put something aside for your future. If you don't take care of yourself, will there always be someone around to do so? Perhaps not.

2. Invest, Don't Just Save.  A bank account, be it checking or savings, can be useful for daily access to a portion of your savings. But the interest on bank accounts is so low that it will probably not even keep you ahead of inflation. A bank account is not an investment. You should invest the majority of your savings (above a certain amount) in stocks and bonds in order to stay ahead of inflation and build for your future security.

3. Diversify your Investments by using Mutual Funds.  Don't put all your eggs in one basket. Diversification lowers risk. Mutual funds provide automatic, built-in diversification because each mutual fund owns lots of stocks and/or bonds. Buying individual stocks and bonds is often more risky for the smaller investor. 

4. Get Professional Help with your Investments. You probably wouldn't play tennis against a professional (like Pete Sampras) and expect to do well. Most participants in the stock or bond markets are professionals - they are the people that you are "playing against" when you invest. How can you expect to win without a professional on your side? Currently there are over 10,000 mutual funds available. A professional can help you choose which funds are best for you, how many to invest in, and how much to put in each one. A professional will also manage your portfolio over time as market conditions and your goals may change.

5. Fee-Only Investment Advisors are More Objective than Commissioned Brokers or Other Salespeople.  Brokers, insurance sales people, most financial planners, banks and others (all of whom call themselves "financial advisors" or some similar euphemism) are all compensated by commissions on the sale of mutual funds and other financial "products" to you. Their motivation could be to sell you the mutual funds with the highest commissions, not the mutual funds that are necessarily the best for you. Do not pay attention to what financial advisors call themselves - find out how they get paid. Investment advisors who simply charge an annual fee for their professional service are the most objective helpers to use - they have no commission axe to grind.

6. Don't Procrastinate.  Many people wait passively until either (a) a broker sells them something or (b) late in life when the impact of good investing is lessened (because of the loss of the great power of compounding over longer time periods). If you want to do a good job of anything- playing baseball, sewing, or investing - you have to be active, grab the bull by the horns and get started.