According to one portfolio manager, investors should apply the same logic to buying stocks as they do when shopping for deals at the mall. For example, say there’s a pair of shoes you’ve had your eye on, and they’re asking a hundred dollars for them.
The following week you notice there’s a sale on them and now they’re only eighty dollars. You are more likely to buy them now that they are on sale. The same kind of attitude can be beneficial when applying it to buying stocks. Don’t buy the first stock that grabs your attention; there may be a better stock available.
Some who are new to investing may think there’s a secret recipe for success, but there’s not. There’s no secret, magical system or special tricks you can use for making investments successful.
First learning to follow a few basic principles is one of the most important things you can do. By using a basic formula, one that’s simple yet effective, you’ll fare much better than looking for shortcuts and hot stocks. Keep in mind, however, that the stock market can be volatile and unforgiving.
Rewards and risk go hand in hand; you can’t have one without the other. You won’t always pick a huge winner. You may never choose a huge winner. However, if you learn to be a better investor, you can increase your revenue over time.
First, Learn to Invest Properly
Take one step at a time. First, make sure you have your proverbial ducks in a row. Here’s a quick rundown of ten easy steps for initially learning how to intelligently invest:
-Get your finances in order. Investing can be used to prepare for retirement, a child, or your child’s education. However, you can’t invest money you don’t have. Fortunately, you don’t need a lot to begin investing, but you do need to know how much you have available.
-Learn basic investing. You don’t have to be an expert investor, but you do need to learn terminology, the difference between certificates of deposit (CDs), exchange-traded funds (ETFs), mutual funds, bonds, and stocks. Learn what financial theories are, such as market efficiency, diversification, and portfoliooptimization. You can learn from reading about investing from books written by successful investors like Warren Buffet. (His story is fantastic as well.)
-Set goals for yourself. Once you’ve established how much money you have to invest, you need to set an investing goal. What’s best for you will depend mostly on how old you- are and for what you’re saving.
-Determine how much you’re willing to risk. Investments are going to fluctuate, but you don’t want to hold onto a stock that’s bottoming out. Decide how much you can lose without hurting you too much and stick with it. If you want low risk, you’ll generally get a lower rate of return, but over time it certainly adds up. Higher risks typically give you a higher rate of return, but there’s also a higher risk rate as well.
-Sometimes you may need the advice of a broker or advisor, however, the type of such help depends on both how much you’re willing to spend and risk. Choosing to hire a broker or advisor is a big decision, but if you don’t feel comfortable making decisions yourself, then it’s probably for the best.
-Choose your investments. If you are a conservative investor, most of your investments should be low-risk, such as money market funds and treasury bonds. Those who don’t want to choose specific stock may like mutual funds or ETFs. The key to selecting your investments is to diversify. Don’t put all your eggs in one basket! It can be very risky investing all your capital in one stock. It can be risky to invest only in one industry. It can also be risky to only invest in stocks. You need a balanced, diversified investment approach.
-Do research. Learn to assess the value of a company. Think of it as buying a company and not just its stock. You want the company to be making a profit so that you can participate in reaping benefits from its long-term success. If a company isn’t making a profit, you are only speculating that it might. Diversify. Some stocks, even if they’re cheap and seem like a great idea, aren’t, such as during a bear market. The price of a stock depends on a variety of factors, such as the political climate, the general economy, the industry, and its customer base.
Be smart and use common sense. If someone were to ask you why you chose a specific stock, have an answer ready.
Don’t pick one “on a hunch.” Set a stop-loss order, so you don’t lose more than you decided before that you’re willing to risk, generally ten percent is a good, round number. Keep on eye on your stocks. If they haven’t done anything in a while, consider selling.
The Bottom Line
Learn to keep your emotions in check when investing. Don’t let greed or fear guide your decisions. Expect fluctuations in your stock and your overall portfolio. When you are long-term investing, don’t worry about the short-term movements.
Don’t panic. Don’t allow greed to make you hold out for a higher price, but don’t let fear have you sell too soon, either. The name of the game is to buy low, sell high.
Those who are unsuccessful at investing inadvertently buy high and end up selling low due to steering with their emotions. A good rule of thumb is if your investment portfolio is worrying you and keeping you up at night, it’s time to reconsider how much you’re willing to risk.
Review your portfolio often and adjust as needed. The more you learn, the better you’ll get at choosing investments and letting some go. Even if your overall portfolio is doing well, it’s still a good idea to check out individual momentum of each investment. Continually analyzing how your investments are doing and rebalancing as needed is key to investing successfully.
One last piece of advice, while investing in the stock market is almost always good advice, there are other places to invest your money, such as peer-to-peer lending, which is basically loaning money like a bank for a decent rate of return; real estate is almost always a good investment, and there are lots of ways to invest in real estate without actually having to deal with physical property; but lastly, invest in yourself! Remember not to get too tied up in your investment portfolio. After all, you are your best asset!