5 Tips for New Investors
"For better, for worse, for richer, for poorer…" Stepping into an investment world is rather a long-lasting union than a holiday fling. That is why before opening this door the soon-to-be-investors should be certain they are ready for it.
1. Planning is the New Black
Every journey starts with choosing a destination and drawing a road map. Otherwise how could travelers know if they are on track or if they are lost? The same applies to investing. At every stage of their journey investors need to know where they are and whether they need to correct their route. Firstly investors need to define their goals: is it to put a child through education or to secure autumn years? Next questions will shape the investment further and allow to select investment strategy: how much to invest, how much risk to take, what is the return expectation, when and how to evaluate the progress. As Warren Buffett said "Someone's sitting in the shade today because someone planted a tree a long time ago."
2. Do Your Homework
Good preparation is at least half of the success. Especially knowing that it is impossible to predict markets, investors shouldn't leave too much to fate. Michael Mauboussin, Head of Global Financial Strategies at Credit Suisse sees discipline as one of the three factors helping to reduce the role of luck in investments and allow to get more control over it: "Discipline, diversification and long-term strategy." Although investors need to be prepared for a life-long education it doesn't need to be boring. There is a number of online tools to get a grasp on the theory of investing and practice it in a safe environment of a virtual game. And once in the game and on the verge of an investment decision, apply Michael Mauboussin's another advice: "First, analyze a stock's price. What are the expectations for the future – the likely revenues, operating profits, and investment requirements for the coming years. Second, find out whether the company is likely to do better or worse than expected, using strategic and financial analysis. Third, buy or sell".
3. Don't Put All Eggs in One Basket
Diversify – this simple and timeless advice works for everyone and everywhere. Diversification is also the second factor on Michael Mauboussin's list of elements necessary to gain more control over investment, and it is the best way to mitigate risks. It is not a secret that investing is about gains and losses. The point is to make the former as big as possible, while protecting oneself against the latter. The worst case scenario would be to put all money into one company and watch it going bust. Diversification is an investor's weapon, as it helps managing the risk involved in every investment. What does it take to diversify a portfolio? Well, it depends greatly on individual situation: the size of a portfolio, investor's willingness to take risk or investment horizon. Investors should consider diversifying across asset classes, across industries or across countries and regions. Those who find it difficult to diversify may consider investing in a mutual fund, to get exposure to a number of companies in an easier and cheaper way.
The two most vicious emotions in the investment world are greed and fear.
4. Stop Being Human
Emotions are what make us humans. And emotions are what ruins investments. If only there was a switch to turn them off and back on again! Well, there isn't and when it comes to investing, both negative and positive feelings may bring devastating results. Money is a sensitive subject and it is very easy to lose a cool head. Michael Mauboussin points out our aversion to losses: "People are roughly twice as fearful of losing money as they are happy about making a profit."
The two most vicious emotions in the investment world are greed and fear. Warren Buffett and many other investment specialists warn against rapid decisions "made" by fear when markets are low or "greed" when markets are high. You've done the hard work before investing, right? Investors who planned their investment carefully are confident enough not to rush into any sudden decisions just because there is some turbulence on the market. There always have been and there always will be! Obvious it may be, but buying high and selling low is one of the most common mistakes. Olivier P. Müller from Credit Suisse's Investment Strategy & Research adds that both discipline and a systematic, consistent framework are essential to any investment success, be it for institutional or private investors.
5. To DIY or not to DIY?
While investing is a great way to achieve financial goals, it is also a challenging and demanding task. Investors need to be prepared to dedicate their time to educate themselves, to learn about companies they want to invest in as well as lo learn to filter the news in order to establish what is more and what is less important. Or to seek professional advice. On top of that there is the emotional ride. Investing touches two very sensitive subjects: it is about money and about the future. And these are not the topics anybody can discuss light-heartedly. Investors uncertain about their ability to commit enough time and effort, and too emotional to get a good night sleep during a bear market, probably shouldn't go DIY. The best option for them may be to find a professional service reliable and trustworthy enough to let them do the hard work of earning by investing.