When it comes to being successful in investing, there are many factors that come into play. One major factor is actually having the money to invest, which requires living within one’s means and saving money which can then be invested. Another one is having the interest in gaining knowledge of how investments work, and what decisions can be made.
To the latter point, there are a number of lessons that can be learned and applied when it comes to investing and working toward long-term goals. We can then take those lessons and translate them into a series of tips on investing. Here are 10 that just might help:
1) Remember the Time Value of Money. If you are setting investment goals in terms of absolute dollars, don’t just think in terms of what that money would buy today. Rather, you might also want to consider how the purchasing power of money changes over time. A dollar today is worth more than a dollar tomorrow, as the saying goes. Barring deflation, an amount of money today will buy less in the future. Perhaps much less, depending on the duration of time. This can impact investing decisions because our goals need to be set on money needs and price levels of the future.
2) Losses can be Tough to Recover From. Now, it’s always good to be tough and resilient, and be able to bounce back from adversity. When it comes to investments, that can also be true. However, it’s also a matter of math that makes losses particularly onerous. Don’t lose money, as can be seen from this example: If you have $100 and lose 20%, you’ll have $80 left. If you then gain back 20%, you’ll still only have $96. You would need to gain 25% in order to reach $100 and recover from your 20% loss.
3) Don’t Put All Your Eggs in One Basket. This one would seem obvious, but some people believe that it’s always best to focus primary efforts on one endeavor – including investment choices. For example, investing all or most of your money in stocks of companies in the industry that you know best. What if the industry goes down? What if you’re (gasp) wrong? It can happen to most any of us. Best to diversify risks to a solid degree.
4) Practice Asset Allocation. This is related to #3 above, but focuses on classes of assets. In this case, we’re talking about making sure that you’re not focusing on being way too heavy in stocks, too invested in real estate, or strictly playing it “safe” with putting most of what you have in cash. Rather, examine your time horizon toward retirement – or other big spending needs – and arrange your portfolio accordingly.
5) Keep in Mind that Rate of Return Matters. Earning just a few percentage points more per year on your investments, when compounded over time, can make the difference between early retirement and working late into life. Every little bit counts when it comes to rate of return on investments.
6) Investment Bubbles Do Happen – So Watch for Them. We often think of the housing bubble as a recent example, but don’t forget the dot com bubble from the late 1990’s. Actually, keep in mind that bubbles go much further back in history, with the Dutch Tulip Bubble of the 1600’s being a prime example. The good times, when it comes to assets significantly increasing in value each year, don’t last forever. There are cycles, and there potential investment bubbles to consider.
7) Markets Can Often Be Reactionary – Which Brings Risks and Opportunities. I’ve looked at a few situations in the past, analyzing the bounce back in the NIKKEI and impact of the tragic tsunami on Japanese stocks, and the performance in U.S. markets the months after the credit downgrade. It seems as though stock markets overreact to bad news in many cases. One could lose a lot by being impatient, and could potentially make a lot by taking advantage of buying opportunities.
8) Index Funds Often Outperform Other Funds. Index funds typically have relatively low turnover and low expenses. There aren’t a lot of judgement calls made on fund composition, compared to many other funds. However, quite often, index funds outperform managed funds. This has been shown to be evident across cap size, in fairly recent analysis. Something to consider, when tempted to look past a “boring” fund.
9) Target-Date Funds Might Not Be Ideal for Everyone. One might wonder, are target-date funds good? Well, time is precious, and these things can save you time and effort. However, they could have some drawbacks. You might have less control, they might not match up with your risk tolerance, and re-balancing could be less frequent than you may like. Best to do your own assessment to see how they fit for you.
10) You Don’t Have to Check Stock Prices Daily. For most individual investors – typical middle-class folks – checking stock prices daily doesn’t make sense. If you’re wondering how often to check stock prices, I think the answer for most people is not every day. While it’s good to be informed and on top of things, one need not be consumed by minor volatility to the point of obsession or excess trading. Perhaps a monthly review would suffice.
My Questions For You
How many of these tips do you consider in your approach to investing?
Which of these resonate the most with you?
Do you have any others to share?