5 Things Successful Investors Do
It can be hard to cut through the cacophony of Wall Street, considering how much coverage there is from so-called experts on television, internet blogs and various other media outlets. But if you pay close attention, you’ll notice something vitally important: they almost never agree on anything.
One analysts might predict doom in the next quarter, while another says his data shows a continued bull market for years. If you listened to everyone, you’d likely find yourself frozen; unable to invest at all.
Instead, follow these 5 simple investment guidelines and free yourself from doubt.
1. Develop an Investment Philosophy
I’m not talking about philosophers like Kant or Nietzsche – I’m talking about developing your own investment model. You need to figure out what your risk tolerance is, what your investment goals are and how you believe markets operate – i.e. EMH Theory and similar systems. You also need to come up with an ideal portfolio, whether you will hold just stocks or include mutual funds, bonds, index funds, ETFs, and so on.
2. Have a Buy and Sell Price in Mind Before Investing
Before you decide to pull the trigger on a stock, you should already have a buy and sell price in mind. If the stock never drops to your predetermined buy price, then you shouldn’t invest. Conversely, once a stock reaches your sell price, take the profits and sell the stock – unless there are extenuating circumstances which make you increase the sell price, such as a surprise earnings upside.
3. Don’t Panic
Here’s a golden rule all successful investors follow – don’t panic. When markets are down and volatility is up, disciplined investors take advantage of the chaos by buying into fundamentally valuable stocks while their priced below market price. Warren Buffett is well known for his buying sprees when the markets are down.
4. Invest In What You Know
There’s nothing wrong with admitting that you don’t understand particular businesses of industries. It doesn’t matter if everyone’s telling you a company is a buy, if you don’t know what exactly the company does, how it makes money and how it could grow in the future, it’s best to stay away. Stick with business models you understand so you’ll be better prepared to interpret earnings reports and news articles.
5. Know When To Fold
To quote Kenny Rogers, you gotta know when to hold ’em, and know when to fold ’em. It never feels good to sell a stock at a loss, but hanging on to a loser while it continues to decline in the hopes that a miracle will happen in your favor is a bad idea. Know ahead of time at what point you’ll consider an investment un-salvagable so you don’t waste time and resources chasing a loss.
One other essential rule for successful investing is to keep your portfolio diversified. You’ve probably heard it touted over and over again, and for good reason. When you keep your assets spread out over different sectors of the economy and globe, it minimizes the risk of a single event having catastrophic consequences for your whole portfolio. Keep this in mind along with the aforementioned five tips and you’ll be well on your way to higher profits.