The stock market can be tricky. It is very easy to lose a great deal of your money in the stocks if you are not careful. And yet, we see examples of successful investors everyday who have consistently done well investing money in the markets.
What is it they know that you may not?
We asked a few selected personal finance bloggers to help us solve the puzzle of investing money with success. It turns out that while investing is not a very complicated process, you need to have the discipline and understanding of some basic principles if you want to be successful over time. Let’s find out what these basics are in their own words.
Starting with the Basics
- When should you consider starting taxable investing? Many of us have retirement plans at work and maybe an IRA or a Roth IRA on our own. Yet, we know that these retirement plans are likely not going to be enough when it comes to saving for retirement and all the other life goals we have. Which means, we also need to have taxable investments. PT Money digs deep and explains when it makes sense to start up taxable investing.
- Once you have decided to open up an investment account, it is now time to figure out which broker to go with. There are countless choices in the market. Moolanomy makes this selection process easier for us in How to Choose the Best Stock Broker? stating “There is no such thing as the “best discount broker”. The best really depends on who you are and your investment style. Here are seven criteria to help you determine which stock broker might be the best for you.”
Simple enough, but what should I invest in?
Specially when you are starting out, the key ideas that you need to focus are diversification and costs. Diversification reduces the volatility of your portfolio (or in other words, tendency to fluctuate in value). Keeping costs down always makes sense.
- Low Cost Index Funds are a MoneyNing favorite and I have to agree. Instant diversification with low cost, what is not to like! While they will not make you rich overnight, they are also less likely to suffer large and quick losses.
- One way to buy low cost index funds is using an ETF. Exchange Traded Funds, are a great alternative to mutual funds, writes FreeFromBroke. They also provide excellent liquidity and tax efficiency.
- While most agree that diversification is key to reducing risk, MapleMoney reminds us that we need to consider our house and careers when choosing our portfolio diversification. Very true. It is important to have a complete money perspective in your financial life.
- While we are discussing diversification and index funds, it is also important to note that you can get exposed to real estate using diversified index funds without the hassle of all the overhead and maintenance that comes with owning real estate. This is an excellent advice from RealEstatePro. Typically real estate market is not very highly correlated to the stock market (with the recent crash being a notable exception), so adding these securities to your portfolio is an excellent hedge against market volatility.
Okay, is there anything I should watch out for?
Plenty! And you will get to know most of them soon enough. Scams abound, as you can imagine in any industry that has to do with money. Beware of the hot tips you get from your coworker or that pretty lady sitting next to you in the subway. Some of the most nefarious ones, as Jeff Rose writing in Good Financial Cents points out, are the penny stock scams. You may also want to structure your finances to be crash proof.
Got it. I am now ready to move to the next level
Great. As you found out, it is not all that difficult. The next two articles describe 2 ways you can automate your investments in a way that maximizes your returns and reduces risk at the same time.
- Dollar Cost Averaging is one of the very popular methods of automating your investments. As the Consumer Boomer explains, the DCA strategy is designed to lower your cost per share while at the same time introduce the discipline you need to consistently invest.
- We wrote ab0ut an alternative strategy to DCA called Value Averaging here at Financial Highway some time back. This is little more tricky to set up but the benefits can exceed what you get from Dollar Cost Averaging.
Finally, if you wish to try your hand at picking individual stocks, you should look into the practice of investing called Value Investing. Most successful investors including Benjamin Graham and Warren Buffett are disciples of Value Investing. One particular aspect of value investing involves picking out great companies that are temporarily struggling, or fallen angels. Miranda points us to a great interview and book review with Gabriel Wisdom at AllBusiness that touches on this fascinating topic