“Steve, I’m just trying to get all this stuff figured out,” my friend Charlie told me. 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 is not alone…
I’m sure many of our readers are in a similar situation. So I’m going to cover some of the important basics of successful investing.
These are helpful for both beginning and seasoned investors… They’re a great reminder about the most important things to understand when it comes to the market.
- 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.
- 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.
- 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.
- What’s a good return these days?
Is 5% a good return? In 2003, 5% was a bad return… But when banks are paying near-0% interest and Treasurys aren’t much better, 5% is (sadly) a good return on your safe money. Any more than that and you are taking on real risk.
- 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 Apple, Johnson & Johnson, Wal-Mart, and Microsoft – is a good, “one click” way to own a basket of stocks.
- History repeats – or at least it rhymes.
It’s amazing how investors never learn that history repeats. The 2007 to 2008 bust in property prices is a good example. In 2006, people thought property prices could never go down. Two years later, people thought property prices could 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 in 2008). But even more important is this…
- 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 has 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…
- 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.”
- 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 rules. And you should be successful…
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Source: Daily Wealth