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Taking the fear out of investing

It’s not a secret: I was a bag of nerves after I clicked the ‘invest now’ button for the first time. What would happen if the market suddenly dropped and I lost everything?

Over time, I realised that these thoughts were pointless. I wasn’t going to achieve anything by worrying about something until it actually happened.

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I know others share these feelings of self-doubt, so I wanted to share some steps I took to take the fear out of investing.

Risk tolerance

Before you make your first investment, you should try to assess your level of risk tolerance.

When considering an investment, you should look at the risk-to-reward ratio. A company in trouble might be trading at a low valuation, and therefore return more money. But an investment in it will carry more risk than a steadily successful business.

Investing for a longer period often lowers the risk of your investment losing money, as does a diversified portfolio.

As Warren Buffett has taught us, the first rule of investing is to not lose money.

Due diligence

Over time, I have developed criteria that a company needs to reach before I buy a portion of it. This takes into consideration my risk tolerance and lessons I’ve learnt from past mistakes. Some of my principles involve cash-flow levels, price-to-earning targets, steady management, and growing revenue.

I have my criteria written down and check them off after I’ve reviewed a company.

Don’t look back

If a company hits your criteria and you invest some money in it, try not to let it play on your mind. Successful investing involves turning off a lot of the market noise.

If the market does drop suddenly, be confident that the business you invested in meets your due diligence criteria and risk tolerance levels. If it is a great company, ask yourself if now is a good time to double down on your investment, rather than sell off your stake in it.

But know when to cut your losses. I regularly check the companies I’ve invested in against my criteria. If something changes, then I assess whether or not the time is right to sell my stake in it. If the price has dropped for a benign external reason, then why would I sell my position in it? Again, it might be an opportunity to double-down.

Read, read, read

The more we educate ourselves about investing, the more confident we will become, which will reduce the fear that comes from clicking the ‘invest now’ button.

When it comes to reading, read through everything you can get your hands on. Business magazines, newspapers, books, and company accounts will all help to understand investing better.

Don’t do it

Remember, you don’t have to invest in a business. If the opportunity is almost there but doesn’t meet your due-diligence criteria or risk tolerance levels, ask yourself whether it’s worth it.

After all, investing is more like cricket than baseball: you only have to take the shot when you feel a need to.

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T Sligo has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.