Getting started in investing is an exciting time. Understanding how compound interest works and realising that over time you can build wealth is a powerful motivator. But wait!
Many investors start their journey by losing money. Sadly, they’re not aware of what they should be doing when they first start, and so they pay their tuition needlessly. Here are three things you need to know before you start investing.
Consider your time frame
The longer this can be, the better. However, people tend to think that because the time when they will need their money is far off – such as retirement – they are able to take on any risk.
That’s not the case.
Regardless of the time frame, careful due diligence must be done on every investment. A long time frame means that you can afford to wait out dips in the market. It doesn’t mean that you can ignore company-specific risk and start punting blue sky garbage. Strong and steady wins the race.
Diversify your investments
So you’re an expert in specific field? Great! You have one area of investment where you may have an edge. But that doesn’t mean you should only invest there. Someone who works in oil & gas will have a better grasp of the oil & gas industry than a lay person, but someone who has their occupation in the sector and then puts all of their investment nest eggs into that same sector will have a rough time should the sector take a downturn.
This is why it’s important to spread the risk. Diversification is the one free lunch in investing, and picking between 10 and 20 stocks allows us to protect ourselves. If we have 5% of our portfolio in one stock that goes bust, then that’s not nice. But it’s certainly a lot nicer than if we had 20% of our portfolio in it!
Keep tabs on your investments
Just because you’ve bought for the long term doesn’t mean you can only check your stocks every year. No, you need to be on top of them – what if there is a sudden profit warning that has fundamentally changed the business and the reasons for why you invested?
It’s important to follow your stocks. Know when they will announce their half-year and full-year results. Know when trading updates are due and likely to come out. Know when the AGM is (and attend!).
Many private investors don’t attend AGMs, thinking they’re a waste of time. But getting up close to management and having the opportunity to ask them questions is a valuable resource. It’s a resource that shouldn’t be wasted lightly.
There are many ways to invest, but by investing for the long term, diversifying your portfolio, and keeping track of your investments by regularly following updates, you can significantly increase your chances of success.
Views expressed 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.