7 Basic Tips To Help You Be A Better Investor
You don’t need to be a genius, if you want to be a good investor. Actually, investing is boring and dummy thing and everyone can do it! You need to stick some rules and have some discipline, but it’s not rocket science at all. Here are some basic tips, that can significantly improve the performance of your portfolio. They are so simple and trivial, that many people would ignore them thinking they are too obvious to be true. But they are and can have some substantial effect on your returns.
Don’t forget about fees!
Investors often don’t pay much attention to fees, but they have to. Fees can be substantial break for your return on investment, especially in the long run. If you invest a smaller amount of money, fees can reach 1% of each deal and even more. This means you lose this percentage for sure. If you trade actively, fees can add up to a decent amount. One day I decided to calculate all the fees I paid during the year last, they were around $1 345. If I invested this amount every year at 7.5% for 10 years, I would have made $21,799.92 just from my fees (you can calculate this yourself here). It’s calculated, that reducing your fees with just a percentage can increase your return with more than 20% in the long run.
Don’t get overproud by the bull market.
When the market is bullish and you have long positions, watching your earnings grow can muddy your mind. You may start thinking that you are a genius and you may even beat the market for a while. You may think that it’s because your investing skills are great, but it’s not. This can, and in most cases will, make you take a larger risk than you can afford and you will end up loosing money. Don’t get blinded and know that the market can give, but it also can get from you. Especially is you lose discipline and get overconfident. There are just bull markets, and there are bear markets.
Don’t constantly try to catch all market moves.
Many people try to always invest in the hottest stocks on the market. They have a good analyzed position and it’s not moving much. They see a stock going through the roof and they decide that they don’t want their carefully judged position anymore. They want the rocket. So, what they do it to close their ‘good’ position and buy the sharply rising stock. Although this may turn out to be profitable sometimes, this is not the right thing to do if you are investor (not trader). You should pick your position carefully and stick to them. Nobody can predict exactly which stock will go up and which will go down. Changing your position too frequently not only will increase the cost of your investing, but also you will avoid reaping the profits from your carefully planned holdings. Investing is a marathon, not a quick run.
Don’t buy a stock just because you want to buy it!
Sometimes you have some free cash and you don’t have a clear plan what to do with it. The market is bullish and you decide to buy something, just because you need to buy something. You don’t even devote any time to have a look at the financial report of the company, you know you like it, it’s going up and you buy it. But this is not the right strategy, because is you don’t have a sound and profitable reason to be in a position, you have taken the wrong position. Impulsive investing can make some profits for you sometimes, but this is just not the right thing to do, is you want to be serious, not just playing with your hard earned money.
Don’t diversify too much
Warren Buffett once said that diversification is for people, who don’t really know what they are doing. If you are a new investor, diversification can help you avoid risking too much, but you should know that diversification can help you avoid earning much, too. It works in both sides – limits your market risk, but also limits your potential earnings as well. If you invest with a smaller amount of money, diversification can even be bad for you. Imagine you have $3 000 to invest and you buy stocks of 30 different companies with the money, just to be diversified well. That’s a craze, because this way your average position will be around $100, which means you will pay really big fees as percentage of each position and your portfolio as a whole. If you need to be so well diversifies, you can buy an index fund.
Remember that market can go down as well
After a long period of earnings, investors tend to forget that the market can do down… sometimes significantly. If you are really long term investor, this should not scare you much, but if you plan to use the money from you invest for anything else, know that when invested, their value is relative.
Be aware of sales men
There is a specific type of investment gurus, which are not investors at all, but really good sales men. Have you watched the “Wolf of Wall Street” movie? It’s a nice film on the matter. These people can be really persuasive, they will promise you amazing returns in no time and anything like that. This way you can find yourself in a situation in which you are heavily invested in a poor stock and you will not even know why the heck you have it. Such investment decisions can be devastating for your portfolio, be careful.
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