The question that you really need to ask yourself before committing yourself to investing is this…
”am I really an investor or am I saver?”
If you consider yourself a saver, maybe investing your hard earned money into the stockmarket is not for you. In my view if you are a saver, then cash type deposits may be a better and safer place to keep your money. The returns may be less, however you will not be affected by the rises and falls in the markets. But let’s assume you have decided you are an investor and want to invest and be speculative with some of your money. The problem for most people is that they make the same mistakes, which ultimately leads them to losing money and they become disillusioned. The end result being they pull their money out usually at the wrong time, declaring that you can’t make money in the stockmarket. Ask Warren Buffett what he thinks and he will tell you otherwise.
So here are my personal golden rules that I stick to through thick and thin so that “A” in the long run I make more money and “B” I don’t get emotional and stall out of the market at the wrong time.
- I never buying high – Many people get sucked into a fast rising market as they think they are getting left behind. I’ve seen it happen in the stockmarket several times and I’ve seen it at least twice in the property market. So if everyone and their Granny are buying into the market because its racing away, be very careful.
- I don’t lose sight of my long term objective – When most people invest they have a longer term objective, at least 5 years, but probably 10 years or more. We all have an idea of how much capacity we have for loss; however when the value of your investment falls often a different set of emotions take over and investors become short sighted and sell out.
- I don’t move with the herd – Ever had a share tip? or something new comes along and everyone is saying you’ve got to get on this one or you will be left behind? Dot com boom? Too often investors invest because everyone else is. To quote Warren Buffett, he says “be fearful when others are greedy”
- I don’t allow my risk to change – The key to successful investing is knowing how much risk you are prepared to take or to put that in even plainer language – How much are you prepared to lose before you lose your nerve? Often investors get drawn into investing in something that on the surface looks exciting, but how much risk are you taking needs to be understood before committing to investing.
- I never take a short term view – Ever thought you could make a quick turn on a share because you think the share price can only head north? The problem here is that no one really knows what is going to happen to the markets. Even the best are just making an educated call and they can get it wrong too. Often short term positions can rapidly turn into long term paper losses.
- I always diversify my investments – Many investors who have a good experience with one particular investment or type of investment and continue to investment more and more money the same way. The problem here is that if the investment makes a turn for the worse all of a sudden your entirely investment portfolio can start to look rather sick. Diversification is the key to controlling your risk.
- I always review my investments – Regular reviews of how your investments are performing is key to making long term profits. The benefits are many fold. Firstly, you can see what profits or losses you have made. Secondly you can quickly identify the investments that are not performing and at the very least put them on a close watch list. If you do decide it’s not going to pull round you can quickly do something about it.