When it comes to investing, there are a variety of tips to follow. It’s important that you manage your strategy carefully to ensure maximum returns and minimize your potential losses. Through my years of investing, I’ve made many mistakes and have learned from them. Here’s my list of the top things you should and shouldn’t do.
Things To Do When Investing
1. Educate Yourself and Research
When deciding how to allocate your investment portfolio, it is crucial that you conduct research and educate yourself on whatever investment you are considering. Make sure you understand the historical performance, projected future performance, risk level, and tax implications.
Each investment vehicle has its own criteria that you should look into. With stocks, for example, there is a wide variety of research tools available through most online brokers. You can read expert analysts’ reports on most companies and track historical performance, past and projected Earnings Per Share, analysts’ opinions/projected stock price, and other data points. You can also read shareholder reports and quarterly/annual reports.
2. Diversify
Diversification means investing in a variety of asset classes to spread out your risk. It’s a very important concept in investing. The more diversified you are, the more your risk level decreases. If you only have one company stock, for example, your entire investment return is based on that one vehicle. But if you buy multiple company stocks, the risk is spread out among those stocks. The expected return typically decreases the more you diversify, so you’ll need to determine your risk tolerance, as described below.
3. Know Your Risk Tolerance
Your risk tolerance determines how much loss you are willing to accept in exchange for a greater return on your investments. A general rule of thumb is that the higher the potential return, the higher the risk of losing money. For example, if you have a relatively high-risk tolerance, you are willing to invest in higher-risk vehicles. The lower your risk tolerance means you like to invest in safer, less risky investments.
How do you determine your risk tolerance? Several factors can impact your risk tolerance. Your personality can affect how much risk you’re willing to take. If you are more aggressive with your finances you may be tolerant of higher risk, but if you tend to be conservative, then your risk tolerance is lower. Your age affects your risk tolerance – as you get closer to retirement, you will likely be more conservative with your investments vs. someone younger. Finally, your personal financial situation affects your tolerance. Depending on your goals and the amount of your investment funds, your risk tolerance will vary.
4. Have A Long Term Outlook
When investing, it’s important to invest for the long term. Very few people can be successful at day trading or even short-term stock trading. For the average investor, it is best to think of your investments as a way to get returns over time. Following a stock price all day, every day, and trading it when it has a short-term dip or increase is not the ideal strategy. While you should actively monitor your investments, you should realize that most investments generally increase over a long period. That doesn’t mean you should hold onto a consistently underperforming investment, but you shouldn’t make decisions based on one day or week’s results.
5. Invest What You Can Afford
Know your budget and determine what funds you have available for investing. Don’t invest more than you can afford just because you think there may be a great opportunity. All investments have some level of risk, so if you don’t have the money, don’t invest in it. Investing “over your head” is a risky strategy due to the potential to lose money beyond your means.
Things Not To Do When Investing
1. Don’t Invest With Emotions
Your investment decisions should be based on your research, not your gut feelings. For example, don’t invest in a company just because you like their products. While that is a good criterion, you need to educate yourself on their projected outcomes and growth. Use data and logic to determine where to invest.
2. Don’t Have Unrealistic Expectations
Of course, your goal is to increase your investment value over time but be realistic about what your expected return is. Understand each investment in your portfolio and how it is projected to perform, not what you think it should do. Try not to overestimate your potential as it will affect your future investment strategies.
3. Don’t Treat It Like Gambling
While investing does share some of the same characteristics as gambling, it’s not the same. Gambling is mostly based on pure luck and chance, while investing is based on foundational research and education to make the optimal choices. With investing, you can manage risk by studying and projecting performance. It is impossible to eliminate risk, but you can control the risk you take to meet your tolerance level.
4. Don’t Buy Blindly Or Take A Hot Tip
Don’t invest just because someone else tells you it’s a “sure thing”. You should always know exactly what and why you are investing. If someone does give you a tip or you see something in the media, then do your research.
FAQ
How do I know how much to invest?
You should set yourself a budget of how much you plan to invest and don’t go over that. A monthly budget is very helpful in creating a regular schedule of investing. Don’t invest more than you can afford, just because the market is “hot” or someone gives you a tip.
What if my investments suddenly drop in value, should I sell?
Don’t panic and think about long-term investing. On a day-to-day basis, stocks and other investments will go up and down. It’s important not to sell just because they take a dip or shoot up. Track your investments on a long-term, rather than short-term outlook.
How do I know what to invest in?
Do your research and ask for professional advice in order to determine what to invest in. Use the tools in your online broker account to find out what makes sense for you. Don’t just invest in a stock because you think the company is great (although that’s a good place to start) but research their long-term financial outlook.
Isn’t investing just gambling?
While there are some similarities, investing is very different from gambling. While both have an element of risk, investing properly can reduce your risk of losing money, although it can never be eliminated. By doing research and making informed investing decisions, you can give yourself the optimal chance to grow your money.
The information provided on this website is for general informational and educational purposes only and should not be considered financial, investment, legal, or tax advice. While we strive to provide accurate and up-to-date information, we make no guarantees regarding the completeness, reliability, or accuracy of any content. Any financial decisions you make are your responsibility. You should consult with a qualified financial advisor, accountant, or other licensed professional before making decisions based on information found on this site.
Past performance is not indicative of future results. Any examples provided are for illustrative purposes only and may not reflect your individual circumstances. By using this website, you agree that we are not liable for any losses or damages arising from your reliance on the information provided.
