Anyone can invest money wisely for maximum returns by following a few time-tested investment principles. These principles form a sound foundation upon which you may build a successful, strategic portfolio that will enable you to meet your financial objectives. Here are ten principles of investing that you may use to guide your investment choices and help ensure your financial security.
1 Invest Early One of the most powerful of all investing tools is compounding the returns on your money while you are still young. Thanks to the power of compounding interest, the earlier you begin investing, the greater the returns you can earn on your money. According to Charles Schwab, (See Resources below) for every five years that you put off investing, you may have to at least double the amount you invest monthly so as to enjoy the same retirement income.
Can you take a risk?
2 Understand Your Risk Tolerance It is important to assess and understand your risk tolerance to be a successful investor. Risk tolerance refers to the degree of uncertainty that you can handle regarding negative changes in the value of your portfolio. It is determined by your personality, current financial situation and investment goals. Choosing investments that are at or just below your degree of tolerance for risk increases the likelihood that you will stick to your investing strategy even in bad markets. Taking on too much risk will often result in you panicking at the bottom of the market and selling everything. (See Resources below for The New York Institute of Finance risk assessment questionnaire.)
3 Diversify Take heed of the old saw not to "put all your eggs in one basket," and diversify your investments. This means that you spread your asset allocation over different companies, market sectors and asset classes such as bonds, stocks and cash equivalents. This helps ensure that the success of your portfolio is not dependent on any single one of these. By building a diversified portfolio, you minimize risk.
4 Invest for the Long Term It is essential that you take a long-term view when you invest in the stock market. Investment professionals recommend a five- to 10-year range or longer. A 25-year research study by Fidelity (See Resources below) showed that the longer the period that any investor stays invested, the higher the likelihood that she will make money, and the lower the chances that she will lose money. A long-term view will enable you to ride out short term market volatility and grow your investments over time.
Don't spend more than you have to.
5 Minimize Expenses Sales charges, loads, taxes, fees and other investment expenses can reduce your returns and lower the performance of your portfolio. Ways to lower these costs include investing in no-load funds and tax-efficient mutual funds, as well as using discount brokerage firms and/or completing your trades online. You can minimize capital gains taxes by adopting a buy-and-hold strategy.
Turn money into more money.
6 Buy Low, Sell High This principle is one of the indispensable principles of successful investing. It enables you to lock in profits by investing in stock when it is selling at below its market value, and selling when it has risen to a high premium relative to the stocks value.
Balance is key.
7 Periodically Rebalance Your Portfolio Periodically review your portfolio to evaluate its market performance as well as ensuring that your asset allocation and other investment choices are still in line with your needs, goals and long-term financial plans.
8 Avoid Fads Following market fads will, more often than not, cause you to purchase overvalued stock. Fads are typically driven by the very emotions that you must avoid in order to invest for the long term. Furthermore, if everyone is talking about a particular stock, you are probably too late, anyway.
Do your research and trust your gut.
9 Do Your Homework Make informed investment choices by conducting comprehensive research on the companies, industries and market sectors that you want to invest in. You can also find detailed technical analysis at various websites such as Moody's.
10 Don't Second-guess Your Decisions Once you make a decision, stick with it. Don't play the "what-if game," looking back to check the price of a stock after you sell it or a stock that you choose not to buy. The success of your investments relies on your management of your portfolio today and in the future.