A common question I often get is “How do I become a better investor?” I have mentioned before that there is no secret to successful investing…well there is one secret: keep it simple. Some might say that it is easier said then done, but it really isn’t. Just following a few investing principles can make investing a much more enjoyable and successful task.
Identify Your Risk Profile
Sometime ago we discussed the importance of understanding your investor profile. How much risk can you take? Are you a conservative investor or more aggressive? Most novice investors overestimate their risk tolerance until the first market crash, so be realistic when you are assessing your investor profile. Complete this Risk Profile Questionnaire to assess your risk profile.
Keep Expenses Low
Investing costs can eat up a large chunk of your profits, so it is important to pay attention to the investing expenses you incur and find ways to reduce them. A few things you can do is not purchasing fancy and expensive mutual funds; rather look for low cost index funds, find a discount broker with low fees and avoid excessive trading.
Investment Policy Statement
Every investor should have a written investment policy statement to help them keep emotions out of investing. An investment policy statement dictates your investment goals, restrictions, when you’ll buy and sell as well as your asset allocation. Think of it as your map to your destination, without it you’ll get lost.
Keep Investments Simple
A key component of keeping investing simple is…well keeping your investments simple. Avoid exotic investments and an investment you do not understand, follow Buffet’s golden rule: invest in things you understand. Stay away from individual stock portfolio unless you have sufficient funds to diversify appropriately, keep investing boring.
Start Investing Early
I cannot say this enough, start investing early even if it is only a small amount. The power of compounding is the 8th wonder of the world. The best time to invest was yesterday; the next best time is today. By missing out a few years of investing you can miss out on thousands of dollars in interest and gains.
Do not panic when markets crash! If you have a long time horizon, ignore the media and market corrections. The worst thing an investor can do is rushing out of the market when there is a correction, always stay the course and do not panic. In fact, investors see market corrections as sales…so go out and buy!
Time in the Market NOT Timing The Market
This relates to the previous point of not panicking. Investing should not be about timing the market, trying to pick the bottom and top of the market, when you try to time the market you will lose about 99% of the time. Investing is about time in the market, have a long time horizon and you’ll be fine. This will not only keep your investing costs low, but it will also dramatically improve your chances of surviving.
Becoming a better investor does not involve expensive classes or seminars nor does one need an overpaid advisor to be good investor. Just these few simple investing principles can go a long way.
What are your investing principles?