How much should you invest in the stock market? How can you make sure you don’t lose all your money? How do you select the “right” stocks? It is true that there are no foolproof rules that successful investors follow but below are ten tips that should help you along your way.
It is important to start investing at an early age. Young people have the advantage of age on their side and can afford to hold on to investments without being under pressure to sell. This means that they should be able to ride the inevitable volatility with the prospect of good returns over the long term.
•Have clear goals
Before you decide on whether or not a particular type of investment is the right one for you, it is important to have clear goals in mind. Consider whether you will need the money in the short, medium or long term. Once you set your goal, stick to it and don’t be tempted to act on impulse.
The stock market will go up, and it will go down. Successful investors are usually able to ride the wave and realise the greatest returns on their investments as they remain focused on their goals which may include owning their dream home, giving their children the best possible education or planning for a secure retirement.
•Get professional help
If you are a new investor, do get help. Professionals have the expertise and an enormous amount of information with which they can make informed decisions and guide you appropriately. Once you are more accustomed to the market, you can become more involved.
•Make long-term investment
It is important to have a long-term perspective when you invest in the stock market. Historically, stocks have generally outperformed other investment classes over the long term. However, in the short term, the market can be unpredictable; so trying to make day-to-day decisions is really only for your stockbroker or the truly experienced investor.
It is impossible to predict accurately what the stock market will do tomorrow. Sometimes the stock market makes sense and at other times no one can really explain why it is acting in a certain way. Many factors come to bear as to whether the market will go up or down, such as market trends and economic forecasts, the political situation, investor perception, emotions, greed and fear.
•Invest only what you can afford to lose
It is important to be aware of the risk that goes with investment in stock market. Stock market investments are not guaranteed. This means that although you are likely to make money over the long term, you can lose money. If you can’t bear to take much risk and would be devastated by any loss at all, it is best for you to steer clear and invest in guaranteed investments such as fixed deposits, Certificates of Deposit and other money market instruments where your principal is guaranteed.
Bear in mind, however, that sometimes playing it too safe isn’t necessarily the winning formula. If you invest all your money in guaranteed investments, your investments will hardly keep apace with inflation.
•Don’t jump on the bandwagon
Many new investors are enticed by short-term profits. The “get in, get out and make a killing” approach comes with much risk. It is true that many investors make lots of money by actively trading in the short term but be careful.
Stock markets usually move long before any news becomes clear. If you jump into the market after many investors have already acted, it may be too late and you would have missed the boat. If possible, it is best to be positioned before the main directional change takes place, and this takes some understanding of the market. When you make an investment, you should know your reasons for doing so. Relying upon every rumour or tit bit from your brother or neighbour is gambling.
•Buy low, sell high.
This seems so obvious but many investors do the exact opposite! They jump on the bandwagon and invest when the market is already rallying. Once it reverses, they panic and sell. A market decline is not the time to panic and sell, but rather to take advantage of the lower prices. If anything, this should be considered an opportunity to invest in strong companies at bargain prices. Take advantage of current prices, which continue to offer significant discounts. Already there are indications that the market is showing promise.
Allocate a part of your investments in a systematic investment plan. Through cost averaging you buy shares on a regular basis, say monthly, or quarterly. This means that one buys stocks when the market prices are low as well as when they are high. Over the long term you end up buying your shares at a lower average cost.
Do not put all your eggs in one basket. When it comes to buying shares, diversification is essential. Instead of investing all your money in just one or two companies, it’s best to diversify by buying shares in different companies and sectors. Any losses caused by the downslide in one sector may be covered by a rise in another, as it is unlikely that all segments will perform in exactly the same way and decline together.
•Build your knowledge
One of the best investments you can make in yourself is to take the time and trouble to improve your knowledge of investing. There is a plethora of information and research by professional analysts and experts, which will be a good guide. Resolve to make the time to build your knowledge through articles, seminars, etc. You will be surprised to see how much you can learn in a year.
Investing is a journey towards achieving your goals. If you keep them in mind and work towards your master plan you wont be easily derailed by market hype and volatility. Your own unique circumstances should ultimately determine how much, how and when you should invest.