“I’m just trying to figure all this investing stuff out,” my friend Dan told me over the weekend. He’s just starting out and new to the world of investing
“I’m paralyzed,” he stated. “I don’t know what to do. I’m reading everything… But I’m not actually doing anything with my money.”
“You’re doing the right thing Dan,” I said. “Learning first – and not doing anything stupid with your money – is exactly the right thing to do.”
Dan is not alone…
I’m sure many people out there are in a similar situation. So today, I’m going to cover some of the important basics of successful investing.
These are helpful for beginning and seasoned investors. The points below should act as a great reminder about the most important things to understand when it comes to the market and investing.
1. You aren’t going to get rich overnight through investing – A proper investment is one that has at least a five-year horizon. Put another way… Any investment that can double your money in a year is likely to be risky or a scam. You could lose all your money just as quickly. If you don’t adjust your thinking in line with this, chances are you’ll end up losing a lot of money.
2. Start small. That keeps your investing “tuition” or learning cost low – I don’t mean “tuition cost” in the traditional sense. I call your “investing tuition” the money that you inevitably lose on your first investments because of something you didn’t know or understand. Start small, and keep that tuition cost low.
3. Don’t put all your eggs in one basket. Diversification is the key – Don’t put your entire net worth in one property. And make sure you spread your stock holdings around as well by first investing in funds that hold a bunch of stocks. Something like the Vanguard FTSE UK All Share Index Trust (VVFUSI) – which holds an array of stocks, including HSBC, BP, Vodafone and GlaxoSmithKline– is a good, “one click” way to own a basket of stocks.
4. What’s a good return these days? – Is 7% a good return? In 2005, 7% was a bad return… But when banks are paying near-0% interest and Treasury bonds aren’t much better, 7% is (sadly) a good return on your safe money. Any more than that and you are taking on real risk.
5. Don’t invest in something you don’t understand – One of the fastest ways to lose money is to put your funds into something you don’t really understand. If you don’t understand how you’ll make money on the investment – and you can’t point out your risks – you are not ready for that investment. Go study some more. And if you still don’t understand, simply skip that investment.
6. Cut your losses early –There’s no better way to prevent massive losses than to set – and stick to – an exit strategy on every investment you make. It’s the simplest thing you can do to continually increase the value of your portfolio. The best way to do this is a “trailing stop.”
7. History doesn’t necessarily repeat itself but it sure does rhyme – It’s amazing how investors never learn that history repeats. The 2007-2009 bust in property prices is a good example. In 2006, people thought property prices could never go down. Two years later, people thought property prices can never go up. The truth is somewhere in between.
Keep in mind… you want to SELL an investment when it’s expensive and everybody loves it (like housing in 2007). And you want to BUY an investment when everybody hates it (like housing in 2009). But…
8. Don’t fight the trend – To increase your odds of making money, you don’t want to try to catch a falling knife. That is gambling, not investing. Instead, it is much safer to grab that knife once it’s hit and settled a bit. In other words, don’t buy a stock that is going down. Instead, buy something that has started going up…
9. When in doubt, don’t do it – If you have any doubt about putting your money into a new investment… don’t do it. Instead, keep reading and learning. That keeps your investing “tuition cost” way down!
10. Research is Key – Before making any investment, make sure you have done sufficient research for yourself. Don’t go for a ‘hot’ stock tip you have got from a magazine or from a dinner party. Do your own research and invest in an asset you believe will do well.
These are rules to live by. And they’re not just for beginners. Every investor – experienced or novice – should stick to these rules.
As for my friend Dan… by reading and researching first – and not putting money to work yet – he’s made all the right moves.
I would advise you all to follow Dans lead. Learn as much as you can about the markets and investing. Follow these rules and you should be successful.