Before you step into the investment world, you need to be aware of some
important basics and principles to follow. These include knowing where and how
to invest, considering safety margins, steering clear of what sounds attractive
to you and being diverse. These five tips will help you remain a wise investor.
1. Learn What Kind of Investor You Really Are
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If you’re excited about the stock market, mutual funds and short and
long-term investments do you know what kind of investor you are? Do you like
risks or do you want a sure or safe investment? What portion of your income can
you invest? What are your goals for the future?
The best ways to determine your investor type is to seek out experts like Fisher
Investments, Ken Fisher says, “Hundreds of investors ask me questions
each year about the dilemmas they confront. Their worst
problem? Uncertainty.”
It’s easy to obtain a review of your current portfolio from experts in the
industry. If you’ve haven’t entered the investment world yet, a knowledgeable
professional can offer you help via questionnaires and consultations to determine
your investment goals and guide you on where and how to invest. This is much
better than going it alone.
2. Margin of Safety is Key
Investors who keep a margin of safety when buying stocks are smarter. A
margin of safety is where you invest in a stock you believe to be undervalued
by the stock market—like pay $0.50 for stock valued at one dollar—the
difference between the value you pay and the real value is your margin of
safety.
What’s key about investing using the margin of safety method is it
offers you a cushion if the stock goes awry and also protects you against
capital losses.
3. Stick to Your Long-Term Plan and Expect Volatility
Constantly second-guessing your long-term stock investments may harm more
than benefit. The stock market is a volatile place and stocks do rise and lower
from time to time. If you’ve chosen smart and wise stocks or recommended stocks
by your broker that are deemed wise for the long-run, don’t sell them as soon
as you see a drop in price or value.
Learning patience and avoiding paranoia are the best lessons you can learn
when it comes to investing.
4. Don’t Invest in Stocks You “Like”
Many make the mistake of finding a stock whose company bears their last name
or sounds “fun.” For example, someone driving through the wine country of
California may find a vineyard, love the wine and beyond that, the company
possesses their last name.
The number of stocks and companies you can invest in is vast and choosing a
stock because it bears your last name or is product you absolutely love doesn’t
mean the stock will perform well. Before investing in the unknown, learn more
about the company or ask and expert to review past performance and analyze
future performance.
5. Have a Diverse Portfolio
The old saying “never put your eggs in one basket” is certainly true in the
investment world. If you invest in one fund or stock and rely on it alone, you
could end up losing your nest egg. A diverse portfolio should include a
broad array of stocks, bonds, mutual funds and overseas investments.
Delving into the investment world is not only exciting, it can be very
rewarding. These four principles of investing are the best place to start and
seeking the aid of experts is by far the best advice of all.
Hello. I agree with you that to be a good investor, we have to stick to a long term plan and a diversified portfolio. After all, Rome isn’t built in a day, we should be looking at the potential gains that we can get out of a long term investment. Therefore in my opinion, investing in good dividend stocks is a great option.
@Janice – So many people get caught up in the heat of the moment trading and the latest news that Jim Cramer or some guru might be spilling that they put their long term plans aside and go with the flavor of the moment!
Understanding of independent events, as Mike Bloomberg always stresses to his traders, is key: don’t pass up on risky opportunities because a completely independent event didn’t pan out.