5 Questions to Ask Before Acting on a Hot Stock Tip

NEW YORK (MainStreet)—Personal finance expert Andrea Travillian is living proof that anyone can get burned by a "hot" stock tip.

Back in 1996 while Travillian worked as a finance intern, the talk at the office water-cooler turned to investing. One of Travillian's co-workers was high on Value Vision Media (VVTV) as a can't-miss stock. The company was in the emerging online shopping channel space.


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Travillian jumped in without looking – and lost. Value Vision Media struggled to keep up with QVC and other competitors, and the stock lagged. (The company has fallen from a peak valuation of more than $2 billion to about $200 million in 2013.) Travillian only lost about $300 in the deal, but the lessons she learned have lingered.


"First of all, sleep on it," says Travillian, founder of Smart Step, Inc., a financial advisory firm. "Never jump into any investment the second someone tells you to do it. Putting 24 hours between you and the decision allows you to get over that first initial rush of emotional excitement."

So before acting on a tip from friend, family member or business associate, get a good night sleep -- and then ask yourself five tough questions.

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Does the stock fit my strategy? Buying off a tip is often akin to an impulse buy at the grocery store checkout counter – grabbing that Snickers bar doesn't fit with your diet plan, but it still often ends up in the shopping cart. Framing the question of whether to act on a hot tip in relation to your overarching investment strategy, tempers the impulse to buy and allows you to view the potential purchase more rationally. "Ask yourself, does this stock meet the criteria I've established for myself within the guidelines of my plan?" says Eric Dahm, who leads the wealth management practice for Human Investing in Lake Oswego, Ore. If the answer is yes, it might be worthwhile to dig a little deeper. If not, take a pass. And if you don't have a plan, use the tip as a motivator to get one started.