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How to fall in love with your stocks

Financial editor Jean Chatzky on keeping smart and unattached on Wall Street.
/ Source: TODAY

When you love the actual company and their product, when should you buy or sell their stock? If the stock skyrockets or suddenly drops — is that the right time to hold on or let go? Is it possible you hold on to stocks because you love the company, even though that doesn’t always translate into stellar stocks? TODAY Financial editor Jean Chatzky lists how make smarter investments in the stock market:  

Who should buy individual stocks?
People who have time to really do their homework. In order to put together a diversified portfolio of individual stocks, you need to own — in my opinion — at least a dozen of them. And you need to be able to keep up with what is happening in those companies, with management, with earnings, with prospects for the future. A lot of people do that very successfully these days (and the fact that you can buy these stocks through discount brokerage firms for very low commissions helps to no end). But there are some people who simply get a hot tip from a friend, who don't have time to do their homework. I believe those people are much better off investing in index funds or other mutual funds instead where you know you're getting instant diversification.

Don’t fall in love with your stocks
Early in my career, I did a story on IBM, the stock, after it had taken a major tumble — and looked at how many people's retirement fortunes were trashed. That was because IBM had this reputation for being a stock you could hold forever. It's dangerous to feel that way about any stock, even stocks you were given by your grandparents, or the first stock you ever bought, or the stock of the company you work for.

You have to be able to be unemotional and sell when the time is right to do so. And that's why a lot of professional investors have rules about selling — when a stock they hold falls by 10 to 15 percent, they get out. They lose a little bit of money that way, but they know they're not going to lose their shirts. And if the stock falls further and becomes more attractive again, they can buy it back again.

Don't gorge on company stock
I don't think company stock — the stock of the company you work for — should represent any more than 25 percent of your portfolio. And that's generous; some people in my seat would say 10 percent, but it may be hard to get your holdings down to that level. That's because if the fortunes of that company turn — think Enron, Rite-Aid, Lucent — you may find yourself out of a job at the same time as you're losing your retirement stash. That's doubly uncomfortable.

When is it OK to buy a stock that's had a really good run?When the fundamentals of that company are telling you that things are going to continue to be great for a really long time — and again, that means doing your homework. And also, when the price of that stock compared to other stocks in its category has not gotten expensive. Look at what Jim Cramer said on TODAY last week. Clearly he loves Google. Would he be a buyer now? It doesn't sound like it to me.

With reporting by Arielle McGowen.

Jean Chatzky is an editor-at-large at “Money” magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s “Today” show and is also a columnist for “Life” magazine. She is the author of four books, including “Pay It Down! From Debt to Wealth on $10 a Day” (Portfolio, 2004). To find out more, visit her Web site, .