It can be difficult to get started as an investor, when you don’t know a great deal about investing concepts. This is especially true if you are a meticulous person who is hesitant to begin such a large project before gaining necessary information, skill, and confidence.
Meanwhile, compiling a brief list of everything a new investor should know runs the danger of omitting numerous important details. Indeed, if forced to repeat this procedure, successful investors are certain to differ greatly on what they would put in their top 10 lists.
As a result, we’ve put up what we believe will be a helpful checklist to assist you in becoming a successful investor. We’ve chosen to focus on crucial personal attitudes and broad strategic frameworks that, in our opinion, will assist you in becoming a wise investor.
1. Have a Financial Plan
Starting with a financial plan—one that includes performance targets be the first step toward becoming a successful investor. Setting aims for having specified sums saved by specific dates would be one of these goals and milestones.
Having enough money to facilitate buying a home, supporting your children’s educations, building an emergency fund, having enough to start an entrepreneurial enterprise, or having enough to fund a pleasant retirement are some of the aims in question.
Furthermore, while most individuals think about saving for retirement, achieving financial independence as early as feasible would be an even more desirable objective. Financial Independence, Retire Early is a movement dedicated to this goal (FIRE).
While it is feasible to put together a strong financial plan on your own, if you are unfamiliar with the process, you may want to seek professional assistance from a financial adviser or financial planner, especially one who is a Certified Financial Planner (CFP). Finally, don’t wait. Make a plan as early in your life as feasible, and make it a live document that is updated on a regular basis and in light of changing circumstances and aspirations.
2 . Make Saving a Priority
You must have money to invest before you can become an investor. Most people will need to set aside a percentage of their earnings for savings. If your workplace offers a savings plan, such as a 401(k), it might be a tempting method to automate saving, especially if your employer matches all or part of your contributions.
In addition to using employer-sponsored plans, you may want to examine additional options for automating savings while creating your financial strategy. Building money usually begins with aggressive saving, followed by intelligent investing targeted at increasing those savings.
Living frugal life and spending with caution is also a key to actively saving. In this line, adopting a budget, meticulously tracking your spending, and constantly analyzing whether your outlays are making sense and producing sufficient value would be a good addition to your financial plan. You can choose from a variety of budgeting programs and software packages, or you can make your own spreadsheets.
3. Understand the Power of Compounding
You may take use of the power of compounding to enhance your wealth by saving and investing on a regular, systematic basis and beginning this discipline as early as feasible in life. The current extended period of historically low interest rates has reduced the power of compounding to some extent, but it has also made it more important to start saving and investing early, because interest-bearing and dividend-paying investments will take longer to double in value than they did previously, all else being equal.
4. Understand Risk
Default risk on a bond (the risk that the issuer will not satisfy its commitments to pay interest or refund principal) and stock volatility are two examples of investment risk (which can produce sharp, sudden increases or decreases in value). Furthermore, there is a tradeoff between risk and return, or risk and reward, in general. That is, earning larger investment returns generally necessitates taking on more risk, including the chance of losing all or part of your investment.
You should assess your individual risk tolerance as part of your planning approach. How much you can afford to lose if a potential investment loses value, and how much price fluctuation in your investments you can tolerate without becoming overly concerned, will be crucial factors in evaluating what types of investments are best for you.
5. Understand Diversification and Asset Allocation
Diversification and asset allocation are two ideas that are closely related and play critical roles in controlling investment risk and maximizing investment returns. Diversification, in general, entails spreading your investment portfolio across a variety of assets in the hopes of offsetting poor returns or losses in some with above-average returns or gains in others. Similar to asset allocation, asset allocation focuses on spreading your portfolio over main investment categories such as equities, bonds, and cash.
Your continuing financial planning strategy should evaluate your asset allocation and diversification selections on a frequent basis.
6. Keep Costs Low
You have no control over future investment returns, but you do have control over costs. Costs (such as transaction fees, investment management fees, account fees, and so on) can also be a significant drag on investment performance. Similarly, in the case of mutual funds, a higher cost does not always imply better performance.
7. Understand Classic Investment Strategies
Active versus passive investing, value versus growth investing, and income-oriented versus gains-oriented investing are all investment techniques that a new investor should be familiar with.
While competent investment managers can outperform the market, only a small percentage of them can do so consistently over time. As a result, some financial experts propose low-cost passive investing strategies that strive to track the market, such as index funds.
Value investors select equities that look to be relatively inexpensive in comparison to the market on measures such as price-earnings ratios (P/E), anticipating that these firms will have both upside potential and little negative risk. Growth investors, on the other hand, perceive more potential for profit in businesses that are experiencing strong sales and profits growth, even if they are quite pricey.
Investors who desire a regular supply of dividends and interest do so for a variety of reasons: they need the money now, or they perceive it as a risk-management technique, or both. Focusing on stocks that promise dividend growth is one of the income-oriented investment options.
Gains-oriented investors are less concerned with income streams from their investments and instead seek out investments that appear to have the greatest potential for long-term price appreciation.
8. Be Disciplined
Stay disciplined if you are investing for the long run, according to a well-thought-out and well-constructed financial strategy. Try not to be fazed or alarmed by short-term market volatility and fear-inducing media coverage of the markets that borders on sensationalism. Also, take market pundits’ predictions with a grain of salt unless they have a long track record of predicted accuracy that has been independently validated. Only a few do.
9. Think Like an Owner or Lender
Stocks are fractional shares of a company’s ownership. Bonds are essentially loans from the investor to the issuer. Think like a prospective business owner or a prospective lender before you buy a stock or a bond if you want to be a smart long-term investor rather than a short-term speculator. Do you want to be a shareholder in that company or a creditor to that company?
10. If You Don’t Understand It, Don’t Invest in It
Because of the emergence of complicated and novel investment products, as well as organizations with complex and novel business strategies, new investors are confronted with a large array of investment options that they may not completely comprehend. Never make an investment that you don’t fully comprehend, especially when it comes to potential hazards, according to a simple and reasonable rule of thumb. A corollary is to be wary of investment fads, as many of them may not survive the test of time.