Have you seen the infamous 1980s movie “Trading Places?”
This film was critiqued by investors and stockbrokers for making the world of investing seem simple. However, it was more accurate than most people want to give it credit for, as investing doesn’t require insider knowledge (that’s actually against the law) or a financial degree. What it does require is having a clear framework, a whole lot of patience, discipline, and knowledge to avoid common traps.
If you are new to the world of investments, you will likely need to build base habits that will return dividends over time, so here are five central principles to explore and master before you invest a large amount.
Understand the Investment!
Before you even put a single penny to work, you need to have a solid understanding of what you are investing in. Stock represents ownership. Bonds represent loans from the government or businesses. Funds are a collection of assets, and across all of these, there is no such thing as a guaranteed return (unless you have insider information). You can’t master all these, or other options like cryptocurrency or real estate, but you do need to understand the different risks, time horizon, and rewards. Short-term investments are speculations, long-term investing is a strategy, and the more you know, the more logical your decisions will be. As cryptocurrency is the newest option, if you want to invest in this, it’s worth looking at websites like CoinEx.com for insight and tips. It’s also worth looking at forums for stocks and bonds to get the fundamentals and align them with your savings goal.
Start Small, Start Now
In the world of investing, there is no such thing as a perfect moment, and this is one of the most expensive mistakes you can make as a beginner. Time in the market beats getting the timing of the market right, so start with an amount you’re comfortable losing, even if it is only a few pounds. Early investing is about you building your confidence as well as consistency, not making a fortune. Small and regular contributions will harness compound growth, teach you discipline, and help you to harness some other tricks that can benefit you later.
Diversify!
Placing all of your money into a single stock is not investing, it’s gambling. Diversifying will help you to spread the risks across different assets, sectors, and even locations, so that there is no single failure that can destabilise your investment plan. For those who are new, broad index funds or ETFs offer instant diversification without you needing to do a lot. The goal is not to avoid losses entirely, but to make sure that any losses you have don’t cause bankruptcy.
Control Costs
Loud market noise destroys focus, and investing in stocks or bonds that have high fees will hack at your returns. Choose low-cost investment vehicles and always be mindful of hot tips or bold predictions. The financial media thrives on urgency, whereas successful investors thrive on their own patience. So, check your portfolio less often than you think you should and only rebalance it when necessary. As unthrilling as it is, boring, low-cost, and consistent investments usually beat exciting and expensive ones.
Think Long-Term
The market fluctuates. Unfortunately, this is the price of admission into the world of investments, and new investors will often panic during downturns and will sell too early. Both of these can sabotage long-term gains, so you should decide your strategy in your calmer moments and then follow through when your emotions run high. When it comes to building wealth via investments, it is built by staying through these cycles and not reacting emotionally to them.
Read more:
How to Master Investments For Newcomers