Help! Our First Purchase Was a Loser
by Douglas Gerlach

Q. We just started an investment club. Great! We delved right into it -- started learning how to do research and looking for stocks. Two members were assigned stocks. They presented them and -- bingo bango -- we bought them! I thought it was a good idea to buy them so everyone's interest would grow. Well, naturally, one of the stocks was United Healthcare (before it dropped of course). I just hope we don't get a lot of discouragement. Any kind words of advice for us novices? What did we do wrong? We really tried. Were we too aggressive in the beginning?

A. Don't be discouraged! It's actually quite common for new clubs to show an overall loss in their portfolio for the first year, or even for the first two years. It's not just that new clubs might have members who are inexperienced investors, but that startup expenses and commissions can really take a bite out of your investment capital. In later years, those expenses will be a smaller and smaller percentage of your overall club portfolio until they're finally inconsequential.

I agree with you that it's important for clubs to not wait too long before making their first purchase. If one of the goals of your club is to provide an educational forum for your members, then you can certainly learn more about investing by actually doing it, rather than sitting around talking about it at meeting after meeting. Your decision to urge your club to jump into the market was a good choice, in my opinion.

Now about that stock ... it certainly is providing your club with ample educational opportunities right now! I don't follow United Healthcare, so I can't comment on it specifically, but I do know that sometimes bad stocks happen to good clubs. Whenever a stock doesn't perform as you had hoped it would, it's time to re-evaluate that company. If the reasons that you bought the stock in the first place still seem sound, you should hang on or even consider buying more for your portfolio.

But the real problem is that you don't have a portfolio -- yet. You only own two stocks, so you can't get any of the benefits of a diversified portfolio. According to the National Association of Investors Corporation (NAIC), clubs that follow NAIC's approach can expect an 80 percent success rate in picking stocks that are winners. That means that four out of five stocks you buy will do as well as or better than you expected. That fifth stock? That's the one that will perform worse than you expected. If you own a diversified portfolio of stocks, a single dog in the bunch won't wipe out your entire portfolio. As you build your portfolio, you'll eventually reach the point where one of your holdings could completely tank, and the impact on your overall portfolio would be minimal.

So, what's my advice? Move on. Study some more stocks. Make some additional purchases. As you gain experience and perspective, you'll be able to re-evaluate your losers and see what you can learn from any mistakes you make. And definitely hang in there! Investing in the stock market is best suited for long-term investors; the mistakes you make today could be insignificant twenty years down the road.