Investing is hard. There are so many rules, so many details that investors have to know to be successful. But in today’s world, with many people needing money for retirement, everyone is forced to become investors. While it’s just a start, these few tips should help the average investor improve his chances of success.
Trading off Advice
The world of investing is full of hundreds of books, videos, and TV shows telling investors what to invest in. The majority, probably around 90%, are wrong, dead wrong. Why is that? Well, for starters, no requirements exist to speak about investing. Anybody can do it. And while most book authors and TV pundits have prior experience in investing, many people on Wall Street don’t know much about small time investing. It’s not their fault; Wall Street focuses on big investors and large Fortune 500 companies.
In addition, investing is a skill very hard to perfect. In fact, some writers claim that stock prices are completely random and only luck separates the good investors from the bad. Yes this theory sounds discouraging, but remember, many investors have been successful and make money. The smart investors make their moves and people fail to see them, so it’s impossible to piggyback on their ideas.
Now, in contrast, listening to financial tips and advice can be a great source of basic ideas. So no, don’t make an investment directly off of a piece of advice. What you should do is investigate the advice using your own criteria. Then, if the advice passes your tests, make the call. But no matter what, at least you made the decision, not some person hiding behind a camera or words on a page.
Not Diversifying
Diversification is the process of limiting the risk of a portfolio by reducing the correlation between each of its stocks. In simpler terms, it means buying stocks that have different characteristics, like company size or industry. Just by searching “diversification” on Helium, one sees the importance it carries in investing.
The tech bubble collapse gave a perfect example way investors need to diversify. Many investors only owned tech stocks as it seemed their prices would never fall. Eventually, they did fall, and many investors lost a significant amount of their portfolio. Now, if they had been diversified, their portfolios would have fallen less than heavy tech investors. It’s a trade-off; less upside means less downside. The best way to diversify is buying stocks from many different industries.
Giving in to Greed/Fear
Greed and fear are the two emotions that drive the stock market. Greed propels the market upwards and fear pushes back downwards. New investors struggle to control these emotions. Master them, and you will become a better trader.
The best way for investors to beat greed is to take profits gradually on their trades. Many investors watch a stock go higher and higher until it peaks. Then, the panic as their gain turns into a loss. Taking profits at certain increments, like every 20% gain, allows investors to keep their profits.
On the other hand, fear occurs during large market downturns or crashes. Investors panic and sell their entire portfolios, usually when the market hits the bottom. The only way to beat fear is to walk away. No, don’t walk away from investing, but walk away from your portfolio. Give it a week or two to let the dust settle. Then, reevaluate and make your decision. Most likely, it won’t be a sell order.
Selling Winners, Buying Losers
To many new investors, the above phrase seems to go against common sense. Shouldn’t one take the profits from his profitable stocks and re-invest it in the losing stocks so he will make more when the losing stocks finally go up?
Stock prices follow a trend for the majority of the time. When a stock starts moving upwards, it tends to keep moving upward for a significant amount of time. The same applies to stocks moving downwards. Other stocks have no trend, and most investors should avoid them. The trending of stocks shows why buying losers causes investors to lose money. The new investment keeps losing money, while the sold investment keeps gaining in price.
Buying Penny Stocks
It isn’t surprising many investors, not just new ones, succumb to the allure of penny stocks. The idea of turning a $.10 stock in to $5.00 stock excites every investor. They dream of using a few hundred dollars to make many thousands of dollars and an early retirement. But in truth, investing in penny stocks is almost equal to play slot machines.
Buying penny stocks turns into gambling because the vast majority of them fails and files bankruptcy. Penny stocks are so cheap for a reason. So, if you must invest in penny stocks, please limit them to less than 5% of your portfolio. In fact, the only way to protect yourself is to remove penny stocks from your portfolio permanently. Sure, this means no huge 10,000% gains. But it also guarantees penny stocks won’t take your money, and that is a very important goal-to not lose money.
If these tips do nothing else, they will educate you in a field few people understand, let alone master. For even more tips and advice, the internet holds a bevy of information to learn investing. However, for the best experience, jump right in and start investing. As they say, “practice makes perfect.”