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What You NEED to Know to Be a Successful InvestorBy
Tuesday, August 28, 2012
"Steve, I'm just trying to get all this stuff figured out," my friend Charlie told me over the weekend. He's just starting out in investing.
"I'm paralyzed," he said. "I don't know what to do. I'm reading everything... But I'm not actually doing anything with my money."
"Charlie, you're doing the right thing," I said. "Learning first – and not doing anything stupid with your money – is exactly the right thing to do."
Charlie is not alone...
I'm sure many of our readers are in a similar situation. So today, I'm going to cover some of the important basics of successful investing.
These are helpful for beginning and seasoned investors... They're a great reminder about the most important things to understand when it comes to the market.
1. You aren't going to get rich overnight through investing.
A proper investment is one that has at least a two-year horizon. Said another way... Any investment that can double your money in a month is likely risky. You could lose all your money just as quickly. If you don't adjust your thinking in line with this, chances are you'll end up losing a lot of money.
2. Start small. That keeps your investing "tuition cost" low.
I don't mean "tuition cost" in the traditional sense... I call your "investing tuition" the money that you inevitably lose on your first investments because of something you didn't know or understand. Start small, and keep that tuition cost low.
3. Don't invest in something you don't understand.
One of the fastest ways to lose money is to put your funds into something you don't really understand. If you don't understand how you'll make money on the investment – and you can't point out your risks – you are not ready for that investment. Go study some more. And if you still don't understand, simply skip that investment.
4. What's a good return these days?
Is 5% a good return? A decade ago, 5% was a bad return... But today, 5% is (sadly) a good return on your safe money. That's because banks today are paying near-0% interest. And you get paid less than 2% for putting your money away for 10 years. Any more than that and you are taking on real risk.
5. Where should you invest now?
Younger investors (under age 50) should focus their learning on property and the stock market. Both property (in Florida, at least) and stocks are the best values they've been in decades (with the exception of the March 2009 bottom in stocks). I could be wrong. You could lose money. But I think these are your best shots at making "real" money investing in the next three to five years.
6. Don't put all your eggs in one basket.
Don't put your entire net worth in one property... And make sure you spread your stock holdings around as well by first investing in funds that hold a bunch of stocks. Something like the SPDR Dow Jones Industrial Average Fund (DIA) – which holds 30 stocks, including IBM, ExxonMobil, and Wal-Mart – is a good, "one click" way to own a basket of stocks.
7. History repeats – or at least it rhymes.
It's amazing how investors never learn that history repeats. The recent bust in property prices is a good example. In 2006, people thought property prices could never go down. And now, people think property prices can never go up. The truth is somewhere in between.
Keep in mind... you want to SELL an investment when it's expensive and everybody loves it (like housing in 2006). And you want to BUY an investment when everybody hates it (like housing today). But...
8. Don't fight the trend.
To increase your odds of making money, you don't want to try to catch a falling knife. That is gambling, not investing. Instead, it is much safer to grab that knife once it's hit and settled a bit. In other words, don't buy a stock that is going down. Instead, buy something that has started going up...
9. Cut your losses early.
There's no better way to prevent massive losses than to set – and stick to – an exit strategy on every investment you make. It's the simplest thing you can do to continually increase the value of your portfolio. The best way to do this is a "trailing stop." If you're not familiar with it, check out yesterday's edition of DailyWealth.
10. When in doubt, don't do it.
If you have any doubt about putting your money into a new investment... don't do it. Instead, keep reading and learning. That keeps your investing "tuition cost" way down!
These are rules to live by. And they're not just for beginners. Every investor – experienced or novice – should stick to these rules.
As for my friend Charlie... by reading and researching first – and not putting money to work yet – he's made all the right moves.
I urge you to follow Charlie's lead. Learn as much as you can about the markets and investing. Follow these 10 rules. And you should be successful...
Good investing,
Steve
Further Reading:
Learn more about protecting gains and avoiding losses in the market here...
"If you're not aware of it, you'll lose thousands of dollars before you know it. It is the greatest trap there is in investing."
"If you don't know the basics of this concept," Brian Hunt says, "it's unlikely you'll ever succeed in the stock market."
Market NotesCHINA SLUMPS TO A NEW LOW... AGAIN The bears are still winning the great China debate.
Regular readers know there is a big financial debate centered on China. Some world-class analysts and traders, including Jim Chanos, say the country is a powder keg of government malinvestment... which will cause a huge economic slowdown. On the other hand, you have many "China bulls" who say the bearish arguments are overblown and overhyped.
An easy way to monitor this debate is with the Shanghai Composite Index. This index is like the "Dow Industrials of China." It tracks the price action in the country's most important stocks.
As you can see from today's chart, the Shanghai Composite Index is in a bear market. Early this year, it tried to halt the bear market... only to fail and plummet to new lows. On Monday, it fell to its lowest point since February 2009. It's still a bear market in China.
– Brian Hunt
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