Five Investing Musts Every Dummie Should Know
Although taking the first step in your investing career isn’t easy, it’s the only way to overcome the daunting mental hurdles. So if you’re just starting out, here’s 5 tips we would have loved to have known when we were in your shoes. Hopefully they’ll contribute to your success in the investing world.
#1: Do your research. Do you understand how your index fund works? Do you know anything about the companies that comprise the index? What service or product do they provide? How over or undervalued are their stocks priced at? These are all important questions you should address before investing in any exchange-traded fund or publicly traded company. The more you know about a company will allow you to spot potential green or red lights along the way. Doing research is just like doing homework, it will simply sharpen your skills. Take a few days before you start and enjoy the many resources across the web that provide information on publicly traded companies.
#2: Start slow. Don’t jump into the deep end right off the start. Get your feet wet with small investments, a couple hundred dollars here and there, to get a feel for the dynamics of the markets. Remember, even legends like Warren Buffett or George Soros started with only small initial investments if you can believe that. Gradually they learned what worked and what doesn’t. A couple of hundred dollars invested at the right moment, can end up gaining you more money to invest in the future. So start small and only after you get the hang of this new environment and feel comfortable and confident (but not over confident!), increase your investment in the market. Don’t worry yourself, the markets aren’t going anywhere without you.
#3: Don’t try to beat the market. Many mutual fund managers boast they can, but let’s see them do it over time. Believe us, 96% won’t. Only around 4 percent of mutual fund managers beat the market over a 10 year span. Trying to get clever and beat the market year after year, especially if you’re new to the investment world, isn’t going to work at the end. Instead, invest in proven funds and companies that year after year have shown consistently good returns. Getting lucky one year and making big gains is not uncommon, but maintaining that above average return is very hard to do. That leads us into our next tip.
#4: Consistency. As we just discussed, large gains followed by large losses can spell large problems for new investors. Most newbies simply don’t have the gut for it. Therefore, to build and maintain considerable wealth place your effort in making money at a consistent but lower and predictable rate. Consistency also extends into budgeting and financial discipline. Consistently putting away your allotted amount every month is a proven method of allowing your money to work for you. Following the stock market daily will, overtime, allow you to spot trends in the market, and enable you to better interpret what’s in front of you. This small daily effort will eventually help you to better understand the workings of the market, and will pay off in the future.
#5: Don’t follow the herd. Some of the reasons investors use to justify pulling money out when the market falls confounds me. If your investments are in the right places when the market begins to tip, you’ll be just fine. As history has proven time and time again, eventually the market will turn around, and profits will be reaped. Some claim that investing in a falling market is a smart way to make money over the long term when the market recovers. We couldn’t agree more. Established companies who have weathered the storm before generally bounce back quickly after recessions, and investing in them during low points can make you some hefty profits. So don’t be a sheep and don’t follow the herd during market hysteria. Stay the course, be consistent, and you should come out with the upper hand.