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Learning how to invest
A beginner's guide to successful investing
It is never too late to start saving for retirement or learning how to invest. If you save any sum of money, you will quickly realize that you need to learn the art of successful investing. Yes, it may seem daunting at first with way too much information to assimilate, but even Warren Buffett, one of the world’s wealthiest and most successful of investors, was a novice at some point in his career. There really is no secret. The three characteristics that all successful investors have are knowledge, experience and control of one’s emotions.
Your first assignment is to start reading about investing. Your research can be on the Internet, at your local bookstore, or even at your public library. The objective here is to become generally familiar with the terms and topics that investors and supporting websites discuss. After a few days of this, take one of the many tutorials offered on the Web.
Assignment two in learning how to invest is to enroll in a formal training class. Like any other performance-oriented skill, the best advice early on is to observe and learn from experts in the trade. Put your ego aside, accept that you are an “apprentice”, and allow your mentor to train you in and give you financial help. Education is key to learning what kind of investor you are, how to get started, where to find information, how to develop your investment strategy, how to select stocks, and how to use technical analysis effectively.
Are you ready to start now? No, of course not. In every form of investing, especially higher risk investments such as commodities and currency trading, nearly half of beginners fail in the first six months. Studies have shown that impatience and inexperience are the root causes for failure. Take what you have learned from your training and begin practicing with “virtual” trading. Experiment with selecting a stock, and for now, establish an entry point and profit target, before you record any purchase on your investment spreadsheet. Keep accurate records, and if you spot errors in judgment, analyze where you went wrong. In any event, use this practice exercise to gain confidence in your investing skills before you put any of your real money at risk.
Your investment strategy and disciplined approach to the market should be written down. To learning how to invest you must have a plan or you are inviting the market to take your money. This plan should address the following topics:
- Your investment type – are you a “buy-and-hold” investor or do you prefer to be an active trader looking for opportunities in market swings?
- How have you allocated your investment assets? Generally, investors split their investments between stocks, bonds and cash. Some include real estate in the mix. Be sure to have an emergency fund because you do not want to be forced to sell investments when the timing is not right;
- Is your portfolio diversified to mitigate risk? Do not put all of your eggs in one basket. Mutual funds limit their exposure to any one stock to 5% of their total fund for this reason;
- Have you evaluated the risk of each of your investment choices? Investment returns are all about managing risk. Large companies on major stock exchanges have lower risk profiles than penny stocks traded over the counter. Take the time to understand how to determine the risk level of various stock choices. If you lose sleep at night over your choices, this is a good sign that your risk tolerance is less than what your portfolio is displaying.
The word “risk” has been repeated many times because it is very important to understand the concept if you're learning how to invest. However, for beginning investors, there are a select group of investment vehicles that will address your risk concerns for you. Mutual funds and Exchange Traded Funds (ETF’s) allow you to invest in a group of stocks that have been professionally chosen and offer immediate diversification even for an investor with small amounts of initial capital. Review your options with your broker, who you have spent time choosing to insure he is trustworthy, and respect his guidance. Being an educated investor is your first step to financial freedom.
There are a few remaining pitfalls to be avoided in your quest to emulate Mr. Buffett:
- Beware of fraudsters and tips – you will be bombarded by unsolicited offers and tips promising enormous riches with little or no risk. Be skeptical and know that what sounds too good to be true usually is;
- Be sure to understand investment fees. Read the small print. High fees mean less to invest.
- Do not get emotionally married to your trades. Develop a disciplined approach and execute it without emotional involvement.
Lastly, be flexible and make changes when you feel it is necessary. After all learning how to invest is about to make money, have fun in the process, and get a good night’s sleep.
Tom Cleveland is a market analyst for forex traders, an online resource for the foreign exchange market and online forex trading.
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