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Many individuals who embark on the journey of investing often seek a mystical secret formula for achieving success, as if it were a closely guarded talisman capable of bestowing financial prosperity upon them.
Seasoned veterans, however, will inform you that there is no hidden secret whatsoever. Instead, one must simply acquaint themselves with a handful of fundamental principles, and by adhering to them, their portfolio will remain secure and stable, regardless of the market's unpredictable fluctuations tomorrow, next month, or next year.
1. Set Investing Goals
Try to picture this scene: You and your family talk with your financial adviser (if you use one) to put together a 10-year financial plan.
You try to cover every detail about the plan. The, you compute how you’ll fund your retirement nest egg on a monthly basis, you set how much to set aside for your children’s education, and how much growth to expect on your money.
You try to lay down every bit of measure so that you can see whether you will meet them or shoot an airball.
This is a typical picture that keeps repeating over and over in many families.
A report by Gallup shows that a majority of Americans consider real estate as their best long-term investment from a pool of several investment options. Real estate leads the list of preferred long-term investments by 35%, against stocks at 21%, gold at 16%, and Savings accounts at 17%.
Financial advisors are very familiar with these conversations because it's how they make money.
But let's think about it: would you really feel successful if you met or even exceeded a financial goal you set ten years ago? On the flip side, would you consider it a failure if you fell short of that goal?
Believe it or not, the answer is usually “No!” Goals in the financial world are constantly changing. It's not as simple as just looking at how much you invest and how much it grows.
There are many factors that come into play, like your income, whether you're married or single, the size of your family, medical expenses, and whether you own a home. These things can change unexpectedly and when they do, they impact your ability to save and invest. Sometimes they increase your ability, and other times they decrease it. This means you have to adjust your investment goals accordingly.
2. Choose Your Investing Strategies
One of the essential things you should identify is the kind of investment strategy that would work best for you. It’s not always about what you invest in that spell success. It’s often about how you invest your money.
The US basketball team won’t go into the Olympics without a well-designed game plan – so don’t ever try spending your hard-earned money on stocks and bonds without a decent enough strategy.
These are the four most commonly used strategies that investors use to succeed financially. Of course, you can use more than once – it's even recommended:
The investor focuses on building significant capital gains from emerging small corporations in this strategy. Those who employ this style usually forecast that the small company’s value will grow exponentially.
This has become highly attractive to many investors, thanks to the recorded success of some Fintech stocks – but when you sit down to think about it, this is overly risky.
This strategy has become famous because this is the strategy that Warren Buffet used. Basically, this involves searching and buying undervalued stocks in the market.
You can see that this is not very easy because it will require a lot of discipline and tons of research into companies. There is the normal tendency of the stock market to overreact to sudden news, good or bad.
This sometimes causes the prices to drop and opens the window for value investors to come in, grab some stocks low, and make huge profits later.
In this strategy, the focus is to provide a steady income stream through investments. For this reason, the investor does not need to have the values of their stock investments to skyrocket.
Instead, they want their portfolio to perform well year in and year out. Normally, an income investor looks at instruments that provide regular income, so they concentrate on
This strategy is for aggressive types because it takes on most of the risk. As its label suggests, small-cap investors purchase stocks of small companies with a market cap between $300 million and $2 billion.
Because small caps tend to be more volatile than other stocks, only experienced investors assume this strategy. So, how would you know if a strategy is the most appropriate for you? Establish what your end goal is and then you check which style will fit you best.
For example, would you consider yourself aggressive or conservative?
- If you’re the aggressive type, then you can be comfortable with small-cap investing since you want immediate growth of the innovative companies your buy into.
- For the conservative ones, perhaps income investing is the best for you because you would be at peace with slow but steady growth over the long-term.
Whatever strategy you pick, always weigh your options and choose the one which you will be comfortable doing.
3. Spread Your Investments
Spreading your investments, also known as diversification, is a fundamental principle in investment strategy that involves allocating your investment portfolio across different assets or asset classes.
It is considered a good practice because it helps reduce the overall risk and volatility of your portfolio while potentially enhancing long-term returns. Here's why it's beneficial and how to achieve diversification:
A good investment practice is to spread your holdings. It is your safeguard in case one or more of your investments are not doing well, there are others in your portfolio that will perform better.
You may liken your investments to a buffet. You’ll want to have as many selections as possible by spreading your wealth in stocks, bonds, and other assets.
One common flaw of many investors is focusing on U.S. domestic funds while plenty of international and emerging market investment opportunities exist. Partly to blame is the investors’ tendency to favor their home country because they believe that U.S. stocks have traditionally outpaced their counterpart stocks in other countries.
This makes investing in foreign companies a little challenging.
Historically, however, the returns of international and emerging market funds have been higher than their U.S. counterparts, contrary to popular notions.
Besides diversifying across asset classes, you can explore different investment strategies. For instance, you might consider a mix of growth stocks, value stocks, dividend-paying stocks, or different styles of bond investments.
By diversifying your investment strategies, you can benefit from different market conditions and trends.
Diversification also refers to the types or kinds of investments that you have. Having your investments spread over different asset classes can help you get a steady rate of return over time regardless of how the market behaves.
If the stock market is either too bullish or too bearish, you can get your returns from other asset classes that do not react to the stock market’s volatility.
The best thing you can do is to spread your funds over various asset classes consisting of large, mid and small-cap stocks or mutual funds plus international and emerging markets.
4. Consider Fees, Taxes, Costs, and Terms
In investing and finance, everything matters because of its impact on the bottom line in the aggregate and the long run. You can apply various resource-saving strategies, such as asset placement, to protect your money.
Fees: Fees are charges levied by investment products or services. They can include management, advisory, transaction, and custodian fees. Understanding the fee structure associated with your investments is essential, as high fees can eat into your returns over time. Compare fees across different investment options and choose ones offering a reasonable fee structure without compromising quality.
Taxes: Taxes can have a significant impact on your investment returns. Different investment types, such as stocks, bonds, and real estate, are subject to varying tax rules. It's important to consider the tax implications of your investments, including capital gains tax, dividend tax, and interest income tax.
Costs: In addition to fees, there may be other costs associated with your investments. These costs can include expenses such as research and analysis tools, account maintenance fees, trading costs, or costs related to investment education or professional advice. Consider these costs when evaluating investment options, and ensure that the potential returns justify the expenses incurred.
5. Educate Yourself And Ask Questions
No investor ever knows everything, as even veteran players seek professional help from time to time.
According to a survey conducted by
Keep yourself informed about financial news, market developments, and changes in regulations. Regularly review your investment portfolio and stay abreast of factors that could impact your investments. Stay connected to reliable sources of information and consider subscribing to financial publications or newsletters.
If you feel overwhelmed or lack the expertise to make investment decisions, consider consulting with a financial advisor or investment professional. They can provide valuable insights, personalized guidance, and help you navigate the complexities of investing.
You can also consider using a robo-advisor.
Becoming a smarter investor means acquiring knowledge, developing a long-term mindset, and making informed investment decisions based on research and analysis. It involves understanding different investment strategies, managing risk, and continuously learning to improve your investing skills.
Start by educating yourself about different investment options, risk tolerance, and investment goals. Consider consulting with a financial advisor to help you get started on the right path.
While having a financial background can be advantageous, it is not a prerequisite for becoming a smarter investor. By dedicating time to learning, conducting research, and seeking professional advice when needed, anyone can improve their investing intelligence.
While professional advice can be beneficial, you can still become a smarter investor through self-education and diligent research. Take advantage of educational resources and learn from reputable investment sources.
A smarter investor focuses on long-term growth rather than short-term gains. Trying to time the market or chase quick profits is risky and unpredictable. By taking a long-term approach and investing in quality assets, you increase your chances of achieving sustainable and consistent growth.
To manage risk, it's important to assess your risk tolerance and invest accordingly. Implement strategies like diversification, asset allocation, and risk management techniques such as stop-loss orders. Regularly review your investments and make adjustments as needed to align with your risk tolerance and investment objectives.