Many people who venture into investing often try to look for a mystical secret formula for success like it’s a well-kept talisman to help them attain financial success. Old-timers will tell you that there is no secret at all. One must just learn to stick with a few basic principles and the results will keep your portfolio safe and stable regardless of how the markets somersault tomorrow, next month, or next year.
For example, one of the best strategies for a rewarding investment in the long stretch is selecting the right mix of assets. It will beat placing your bet on just one popular stock or mutual fund. It’s better to simplify your investments and to lower your costs than by trying those hyped-up types or trending stocks. The earlier you build up your investment money, the more funds you’ll have to assemble a more sophisticated investment cocktail later.
1. Set Investing Goals
Try to picture this scene: You and your family talk with your financial adviser (if you use one) to put together a 10-year financial plan. You try to cover every detail about the plan. The, you compute how you’ll fund your retirement nest egg on a monthly basis, you set how much to set aside for your children’s education, and how much growth to expect on your money. You try to lay down every bit of measure so that you can see whether you will meet them or shoot an airball.
This is a typical picture that keeps repeating over and over in many families. Financial advisers are overly familiar with these discussions because this is what they do to earn their income. However, would you really consider it a success if you meet or surpass an investing goal that you made 10 years ago? On the other hand, would you consider it a failure if you fall short of your investing goal?
Believe it or not, the answer is almost always “No!’. Goals are a moving target, especially in the financial realm. It is much more complex than simply measuring the amount you invest and the growth that you achieve. Many factors that affect the end result are ever-changing and complex like your income, marital status, size of your family, your medical expenses, and home ownership. They often change unexpectedly and when they do, they affect your ability to save and invest money either by increasing or to lessening it. This would ultimately cause you to shift your investment goals accordingly.
What is important to realize is that you and your financial goals should be flexible. You’ll learn that in real-life, investing goals are not cast in stone so that you can react and adjust them when you happen upon opportunities or situations that can become more favorable for you. Remember that your goal is not to see later who has a bigger net worth between you and Bill Gates. Your goal is to make sure that you will have money in the future that can sustain a lifestyle that you will choose.
2. Choose Your Investing Strategy
One of the important things you should identify is the kind of investment strategies that would work best for you. It’s not always about what you invest in that spell success. It’s often about how you invest your money. The US basketball team won’t go into the Olympics without a well-designed game plan – so don’t ever try spending your hard-earned money in stocks and bonds without a decent enough strategy.
These are the 4 most commonly used strategies that investors use to succeed financially:
In this strategy, the investor focuses on building large capital gains from emerging small corporations. Those who employ this style usually forecast that the small company’s value will grow exponentially in the future. This has become highly attractive to many investors, thanks to the recorded success of some Fintech stocks – but when you sit down to think about it, this is overly risky.
This strategy has become famous because this is the strategy that Warren Buffet used. Basically, this involves searching and buying undervalued stocks in the market. You can see that this is not very easy because it will require a lot of discipline and tons of research into companies.
There is the normal tendency of the stock market to overreact to sudden news, good or bad. This sometimes causes the prices to drop and opens the window for value investors to come in, grab some stocks low, and make huge profits later.
In this strategy, the focus is to provide a steady income stream through the investments. For this reason, the investor does not need to have the values of their stock investments to skyrocket. Instead, they just want their portfolio to perform well year in and year out. Normally, an income investor looks at instruments that provide regular income, so they concentrate on stocks that give dividends and bonds that pay interest.
This strategy is for aggressive types because it takes on most of the risk. As its label suggests, small-cap investors purchase stocks of small companies that have a market cap between $300 million to $2 billion. Because small caps tend to be more volatile than other stocks, only experienced investors assume this strategy.
So, how would you know if a strategy is the most appropriate for you? Establish what your end goal is and then you check which style will fit you best. For example, would you consider yourself aggressive or conservative?
If you’re the aggressive type, then you can be comfortable with small-cap investing since you want immediate growth of the innovative companies your buy into. For the conservative ones, perhaps income investing is the best for you because you would be at peace with slow but steady growth over the long-term. Whatever strategy you pick, always weigh your options and choose the one which you will be comfortable doing.
3. Spread Your Investments
A good investment practice is to spread your holdings. It is your safeguard in case one or more of your investments are not doing well, there are others in your portfolio that will perform better.
You may liken your investments to a buffet. You’ll want to have as many selections as possible by spreading your wealth in stocks, bonds, and other assets. Experts call also call this as asset allocation.
One common flaw of many investors is focusing just on U.S. domestic funds while there are plenty of international and emerging market investment opportunities. Partly to blame is the investors’ tendency to favor their home country because of the belief that U.S. stocks have traditionally outpaced their counterpart stocks in other countries. This makes investing in foreign companies a little challenging.
Historically, however, the returns of international and emerging market funds have been higher than their U.S. counterparts, contrary to popular notions.
Diversify Your Assets
Diversification also refers to the types or kinds of investments that you have. Having your investments spread over different asset classes can help you get a steady rate of return over time regardless of how the market behaves. If the stock market is either too bullish or too bearish, you can get your returns from other asset classes that do not react to the stock market’s volatility.
For example, if you hold two different types of large-cap mutual funds, they will probably have the same reaction to the market. The best thing you can do is to spread your funds over various asset classes consisting of large, mid and small-cap stocks or mutual funds plus international and emerging markets.
4. Consider Fees, Taxes, Costs, and Terms
In investing and finance, every little thing matters because of their impact to the bottom line in the aggregate and in the long run. You can apply all kinds of resource-saving strategies to protect your money such as asset placement, etc. For example, if you’re a fixed-income investor with holdings of tax-free municipal bonds in taxable brokerage accounts and some corporate bonds in tax shelters like a ROTH IRA, you’re doing it right. You can take advantage of the leveraging effect of getting free money from your employer when they match your 401(k) or 403(b) retirement plan contributions.
It’s a good investment of your time and effort to discover them. With a few small amounts from your own contributions and from your employer’s share, you increase the potential payouts significantly in the future. This is one thing that you should not take for granted.
Just be sure to do a cost-to-benefit analysis by comparing the value of what you are going to get versus what you’re going to give out in exchange. Some novice investors make many crucial mistakes such as focusing on items like expense ratios and management costs at the cost of other more important details. As a result, a lot of them lose in the end because they have to pay more taxes or earn less because of risky and unstable investment choices.
Also, never ignore the fees. Some funds are very attractive, but they charge as much as 1% to the total management expense ratio (MER). In the same way, stockbrokers and financial advisors can charge high fees – just make sure you take those factors when making your income projections.
5. Don’t Afraid To Ask Questions
No investor ever knows everything as even veteran players seek professional help from time-to-time. The trick is finding the right financial advisor for you. Interview candidates and ask them how you should pay them, how many clients they have, their length of the relationship, and also the average size of the portfolio of his clients. You can also consider using a robo advisor (keep in mind the pros and cons of robo advisors)
You’d want to have a good working relationship with your advisor so try to get a sense of how it would be like working with him. Ask him why you should hire him, how will he communicate to you on an ongoing basis, how accessible is he, and how he usually manages his client relationships. Try to dig deeper about his investment philosophy, his firm’s resources, how they manage and protect their investments, and what systems are in place to make sure that your financial advisor’s actions align with your investment goals.
If your advisor creates a portfolio for you, ask why he picked those assets for you. His choices should be according to what you eventually want and not his personal choices. If you are not comfortable with the selection or still feeling some fear from investments, just ask (no matter how silly it appears). It is your right to know since you are paying them for their services and more particularly if they are receiving a commission on the products they sell, you want to protect your interest too.
Buying and selling stocks and other instruments should never be an emotional decision. However, there will be moments when you will give in to your feelings. You are still human. It is important for every investor to realize that a bad investment decision is not necessarily the end of the world – life must still go on. Making intelligent decisions by overcoming emotional impulses and using good research techniques is your ticket to a faster way to financial success.