Learning to invest successfully is easier than most people realize. While it is not rocket science, neither is it as simple as throwing darts on a dart board. That’s because investing is more about investor behavior than investment selection.
To succeed as an investor, you must know what investing is and is not. So, before investing, I want to inform you what it’s not.
Investing is not trading.
Trading requires constantly buying and selling securities (stocks, bonds, and alternatives). Investing, however, is about aligning your investment decisions with your risk tolerance, time horizon, and overall financial situation with companies and investment vehicles with a track record.
If you have a low-risk tolerance, investing in junk bonds would not be acting in alignment. Likewise, investing in crypto because your friend told you about it would be out of alignment if you are a conservative investor with a short-term time horizon (you need the money within the next two to three years).
Investing is not saving.
Most people use the term investing interchangeably with saving. Both saving and investing involve setting aside money today for future use, but they are different.
Savings involves no loss of principal (what you originally invested). Investing, however, is where your money can change in value, moving up and down with the markets (stock or bond markets). This is the biggest difference.
There is potential for higher returns in the long term with investing than with saving money in a savings account.
Savings are more liquid than some types of investments.
Investing is not speculating.
Getting a tip on a mining company and then buying penny stocks in that company is a great example of speculating.
Purchasing various cryptocurrencies because you believe the entire world will embrace them like a warm blanket is pure speculation. Currently, there is no global acceptance or consistent track record.
“The individual investor should act consistently as an investor and not as a speculator. — Benjamin Graham —
What is investing?
Investing is about purchasing an asset with the idea it will increase in value and provide an income.
Eight Tips To Becoming a Successful Investor
After twenty-five years of teaching investing and managing investments, here are the tips for becoming a successful investor.
1. Invest with intention.
Invest with intention: aligned with the essence of who you are, your goals, risk tolerance & what matters most to YOU.
List your financial goals and group them according to when you hope to achieve them. This will determine your time horizon for your investments.
Purchasing a home within the next three years is considered a short-term goal. Therefore, you should be invested in short-term vehicles to achieve this goal with little to no risk (or change in value).
Align with your goals and timelines for those goals.
A goal you can achieve ten years or more from now is a long-term goal. A common example of a long-term goal is retirement if you’re not expecting to retire less than ten years from now.
The biggest mistake investors make is investing in long-term vehicles to achieve short-term goals (trying to make a quick buck), or they invest in short-term vehicles for long-term goals out of fear of risk.
2. Do not let your emotions run the show.
Intentional investing removes the emotion from your decision-making. Remember that most investors buy at the height of the market, and most sell at the bottom. People rarely buy low and sell high despite that prevailing advice. That’s because most investors are ruled by greed and fear.
“The most important quality for an investor is temperament, not intellect.” — Warren Buffett —
3. Have a portion of your portfolio in dividend-paying stocks.
Dividends are profits paid to investors holding shares in a company. That way, you can receive passive income from your dividends if you need it, or you can reinvest them. It’s called a Dividend Reinvestment Plan (DRIP). Reinvesting dividends makes your investments grow faster.
Besides investing in an asset because you believe it will increase in value, successful investors also invest in companies with huge income potential.
“All experienced investors know that earning power exerts a far more potent influence over stock prices than does property value.” — Benjamin Graham —
4. Hold some of your money in safe assets, cash, or bonds.
No matter how aggressive you are, it is always best to hold some of your investments in safe assets like cash and bonds, even if it is just 10 to 20%. That is a buffer when the markets crash, as they will every few years.
5. Don’t put all your eggs in one basket.
Although there are thousands of investments, they all fall within four asset classes: cash (or cash equivalents), fixed income (bonds), stocks (equities), and alternatives (e.g., precious metals, derivatives, cryptocurrency, and real estate).
Diversify by all asset classes and sectors (as in the case of stocks) or durations (as in the case of bonds) within each class. For example, if you were heavily invested in hi-tech in the late 90s, you would have lost more money during the tech bubble burst than someone with a balanced portfolio.
6. Avoid the temptation to time the market.
No one has a crystal ball on how an investment will perform or when the markets hit bottom.
“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” — John Templeton —
Savvy investors know it’s less about market timing and more about spending time in the market, which leads to success. This leads me to my final point …
7. Always invest.
There is a direct correlation between appreciation in the value of an asset and the time it’s allowed to grow. The longer you stay invested, the more time will reward you. Investing takes time. Regardless of how little you start with, the point is to start now and let your investment grow.
8. Keep costs down.
One of the biggest reasons investors have been moving away from mutual funds and into exchange-traded funds is because of the higher fees investing in mutual funds.
This is called the management expense ratio.
The justification for these high fees is that actively managed funds will outperform the stock market. However, most funds analysts manage have consistently performed well below the benchmark.
It is hard to justify the fees constantly eating up your low returns. You are better off investing in an ETF that mimics the major indices, such as the S&P 500.
Bringing it all together
You don’t need to be an expert or an economist to be a successful investor. But you can learn from the pros how to succeed in investing. Investing does take some calculated risk.
These eight tips are a start on your road to wise investing. Next, read books or take courses from accredited sources and learn as much as possible about investing. You’re worth it.