7 Steps To Becoming a Better Investor

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Becoming a successful investor takes time, discipline and lots of patience.  There is no ‘get rich quick scheme’ here or winning lottery ticket to riches when it comes to investing.  However, by following some simple guidelines, avoiding unnecessary risk and leveraging the power of compound interest and time, you will be on a sure fire route to amassing significant wealth.   Below are 7 steps to becoming a better investor.

  • Buy low, sell high-this is really obvious but most people unfortunately do not have the mental nerve to ride out what are mostly short term blips in the market.  Take advantage of corrections and dips in the market as an opportunity to buy more assets.
  • Take advantage of dollar cost averaging-put simply, dollar cost averaging is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule (i.e. invest $1000 every 3 months), regardless of the share price. In this case, an investor would purchase more shares when the share price falls and less when it rises.  The main advantage of this is that it averages out your investment over a specific time period whilst eliminating the need to time the market.
  • Do your research-I always invest in what I know.    I would never invest in a business or asset that I cannot fully understand, simple as that.  In the words of Warren Buffet, ‘risk comes from not knowing what you’re doing’.  In this day and age, there is a tremendous amount of information, research and tools to help you make better informed investment decisions.  Some of my personal favourites include the Wall Street Journal, Barrons, the company’s own website and annual statements, quarterly reports and various online news services.
  • Invest for the long term-timing the market is very hard and can be a very dangerous habit. Even missing a handful of days can be detrimental to an investor’s total returns.  To illustrate this point, if you missed the top 10 percent of trading days in the past 20 years of the S&P 500, you returns would be roughly half of what the S&P would have been.  If you missed the top 20 percent of trading days in that period, you would have gained 2 percent a year.  If for missing the top 30 percent?  You would have lost money!  Always invest with a long term perspective in mind.
  • Don’t sweat the small stuff-your biggest stock failed to beat its latest quarterly estimates? Oil falls 1% month to date?  Don’t panic when tracking the movements of your investments.  There will inevitably be volatility in the short term but you should always focus on the bigger, longer term picture.
  • Don’t put all your eggs in one basket-The last 10 years have been a volatile and ride for investors. Despite these difficulties however, the worst-performing asset classes been cash and commodities. Meanwhile, a typically well-diversified portfolio, including stocks, bonds and some other asset classes, would typically return around 8% per year over this time period. The diversified portfolio has also provided a much smoother ride for investors than investing in just equities. Even if you do decide to invest in pure equities, try to keep it well balanced between a wide range of sector and geographical allocations.  My current portfolio for example, is well diversified between a range of sector allocations, including technology, financials, healthcare, consumer staples and industrials. A more simple strategy may be to just invest in an index ETF such as the S&P 500 for example.

  • Be wary of hidden fees and costs-this is significant as this could greatly affect your net returns. Consider instead low fee investment products that offer good value as well as a cheap and reliable broker such as M1 Finance.  Not only do they provide the best value for money (commission costs are free), but they also enable you to invest long term in a wide variety of shares and ETFs, all with a very simple user friendly interface and at a $0 commission cost to boot.  You can check out M1 Finance here.

What are you currently investing in and what strategies do you implement as part of your investing goals?

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