Advertisements often lead to believing that it is easy to make money by short-term investing in the stock market. On the contrary, statistics reveal that only long-term investors make money with an investment horizon of 10 years and more. A general rule of thumb is that the shorter the investing time frame, the less the probabilities of success. That’s often due to overconfidence and a lack of strategy. Can investors learn from institutions?
Market-leading wealth-management companies and investment advisors focus on long-term investments but should retail investors follow the same approach? For example, Motley Fool is one of the most popular services in this segment for retail traders, and as this extensive Motley Fool review indicates, they do it with great success on multiple investment products. Not necessarily under short-term perspective, but in the long run with a minimum investment horizon and holding period of stocks with a minimum of 5 years, or better more.
What can investors do to invest with the same success and without subscribing to 3rd party services? With the five following simple principles, you can become aware of the most common mistakes to avoid and find guidelines to follow before investing in the stock market.
1. Identify Your Goals
There is a long way to go before investing in the stock market if you want to make it worthwhile for your time and effort. First, you have to identify your short, medium, and long-term goals. Then, take your age, the life cycle you are in, and the number of active and working years you have ahead of you into account.
When you’re young, growing capital should be your top priority. You might want to build a dividend portfolio to earn passive income in your mid-term goals. This can provide surplus income for retirement or a buffer to fall back on during your working years, gradually reducing your workload. When approaching retirement age, wealth preservation takes precedence over all else.
Before making any investment decisions, make it clear when you need that money based on these factors.
2. Consider Your Financial Situation
Before investing, you should create a budget and pay off any high-interest debts, such as credit card debts. In addition, priority should always be given to having at least six months’ worth of emergency funds before putting money aside to invest.
You will have a clear picture of your financial limits and situation if you have a budget. The 50-30-20 principle in personal finance can be used as a general guideline to determine your investment strategy.
You should spend no more than 50% of your income on necessities, 30% on desires, and 20% on investments and savings.
You can create an investment strategy that meets your needs by determining how much money that 20% represents each month, as well as your long-term goals and current age.
3. Learn How To Invest In The Stock Market or Outsource Investment Activities
You can use stock analysis tools to analyze company financials in detail, compare industry leaders, identify investment opportunities, or subscribe to investment newsletters to find good stocks.
Alternatively, you can hire professionals to do it for you. While self-made investing is more time-intensive but comes with lower costs, outsourcing investing to 3rd parties often leads to immense management costs. However, having a professionally managed portfolio is a viable option with significant capital if a low fee can be agreed upon.
Be truthful to yourself. Can you keep an eye on your portfolio for years to come and rearrange it as needed? Will you put in the effort and have the patience to succeed?
If you are willing to put in the time and effort but are unsure of your abilities, index funds and ETFs can be low-risk, high-reward investments that are easily manageable.
4. Know Your Personality
As surprising as it may sound, one’s personality should be considered when selecting investment plans, especially if you manage your portfolio for yourself.
Will you be able to control yourself and not fiddle with your assets once you’ve decided on it and it meets your goals? Some people feel compelled to scrutinize and rearrange their investments on a daily basis. Statistically, this is a terrible idea unless you plan to swing trade.
Your personality also indicates how much risk you are willing to take. There will be downturns, especially in the long run, when your investments do not look so rosy. As a long-term investor, you should not review your portfolio on a daily or even weekly basis. One or two-monthly checkups are sufficient.
Set aside a certain part of your portfolio to always be liquid with the flexibility to add new shares if there is an opportunity.
Be mindful of your risk tolerance, and create a plan accordingly. Don’t force yourself to have sleepless nights later. Investing is done to improve your quality of life, not to add to your worries.
5. Be Aware of The Risks and Pitfalls
Smart people learn from the mistakes of others. Therefore, knowing the most common pitfalls and errors that others make can save you a lot of time and money.
Most people fail in the stock market due to leverage or taking out a loan to invest. Likewise, having an emergency fund that you never touch and only invest surplus money is critical. Being overleveraged, investing on borrowed money, or having to withdraw money from your investments to cover emergency expenses can all lead to disastrous financial decisions that could have been avoided.
Following the hive mentality and abandoning your well-thought-out strategy for fear of missing out is a common mistake among investors, particularly younger ones.
Being a confident and steady investor in the long run and setting aside your emotions is challenging but doable. If you’re honest with yourself about your limitations and try to avoid the most common blunders, you’ll be better off than most people who never even tried.
Interesting Related Article: “An Introduction to Stock Market Day Trading”