As many other young investors I’ve made my share of mistakes. These mistakes are often the result of high return on investment achieved in a short time which leaves you wanting for more (just like a casino). The following is my list of 11 tips for young investors. These are not easily learned but are crucial to success in investments:
1. What goes up might come down – Risk is inherited in investing. Higher returns require higher risks. The risk of investing is not always clear. You can actually lose money and never see it again, no matter what is you term of investment. For example take the NASDAQ index. At 2000 it peaked at level of 5,500 points. If you invested at that time you have yet to see your initial investment returned as the NASDAQ is currently at around 2,650 points.
2. Diversify – Young investors are usually exposed to astounding amounts of information at first from articles on certain stocks to analyst reports recommending other stocks. The hope of getting rich fast (or high return on investment) is usually a false one. It is possible to gain high returns in short times but very much like a casino you might also lose all your money due to the risk involved. Diversification or the purchase of a great amount of various financial assets enables investors to lower risks and smooth return on investment almost regardless of how a specific company performs. A CEO might get a heart attack or a tornado or fire might cause an investment in a specific company with specific risks to disappear.
3. Investing is a long term effort – Young investors often expect results fast and are constantly checking their investments and modifying them. It is important to understand the following facts about investing:
a. Stocks usually over perform, or generate high abnormal returns, only a few days a year – Most of the time they just sit there and move up and down horizontally. If you have no inside information you will surely miss on these days if you won’t hold on to your stocks for the long term.
b. Constantly buying and selling stocks results in high commission payments to your broker or bank which is a waste of money.
4. Invest in the market, not in specific stocks – Many investors think they can beat market performance. It is a well known fact few do. Most of the mutual funds have a hard time generating returns high enough to justify the commissions paid to them. Investing in the market is done by buying ETF’s and mutual funds and sitting tight.
5. Don’t believe every success story you hear – People have a psychological tendency to overstress success and under stress failure. I’ve heard people mentioned 100% and higher returns in a few days. This is, of course, possible, but always requires taking very high risks. It is very likely this person has lost more then he wants to remember.
6. Hold on to winning stocks, don’t be afraid to sell losing ones – Many young investors often sell winning stocks too early and losing stocks too late thinking either the return on investment is enough or that their losses will be regained. More often then not winning stocks will continue to generate high returns and losing ones will continue to lose.
7. For longer terms of investment buy stocks – Stocks have proved, over time, to generate the highest average returns over time. Two warnings here: First, by long term I’m referring to periods of investment of over 10 years. Secondly, buying stocks should not exceed, usually, 60% of your investment portfolio unless you are willing to expose yourself to high risk levels.
8. Use the power of compounding interest – “The most powerful force in the universe is compound interest” Einstein is often quoted for saying. Every 100$ saved for 10 years with 10% yearly interest will be worth 2.5 times more. Save for 20 years and earn 6.7 time the amount. If interest rates are high deposits can be prove a good, and more importantly, safe, investment.
9. Take the time to learn basic finance and budgeting – All the technical gibberish used by banks, insurance and investment companies, salaries and such are just that, technical. There are wonderful source for financial information on line. It doesn’t take a university degree to understand these concepts. As a matter of fact, most of the technicalities aren’t even taught in the university or college.
10. Learn from your mistakes – Don’t miss out on the lesson the market teaches you. Failing in an investment can be seen as tuition for lessons learned.
11. Patience and self discipline are key factors to being a good investor
As I’ve mentioned before the market teaches us these lessons with a hefty cost at times. Implementing these tips will help you save on tuition paid to the market gods (or other investors).