Most new investors consider investing to be a walk in the park. Being overconfident in their ability to invest, they end up making costly mistakes that result in loss of thousands of dollars. The reality is that investing in the corporate world is like sailing on a boat in an ocean full of sharks that can gobble you up if you make a mistake and slip from the boat.
Here are 5 things that you should know if you are starting the journey anew in the cold and somewhat frightful world of investment.
1. Keep Emotions in Check
Our emotions may have helped us survive during the primitive years when we used to live in the middle of a jungle full of dangerous animals. But in the world we live today, emotions act as an obstacle to achieving success in life. And this is particularly true in the investment world.
Beginner investors are often swayed by the emotions when making a decision about buying or selling a particular security option. This usually results in making hasty decisions due to which the individual is not able to earn maximum profits. Sometimes it also leads to making costly mistakes that result in loss of the entire investment amount.
The chairman of Berkshire Hathaway, Warren Buffet had advised the investors that they should have the temperament to control the urges. It’s important that you direct your thoughts properly and control the emotions; otherwise, you will end up making sub-optimal investment decisions. The investment decision should be made after making thorough fundamental and technical analysis by studying the underlying macro and micro economic conditions, charts and graphs.
2. Determine your Risk Tolerance Level
Before making an investment in any financial security option, it is important that you determine the risk tolerance level. Keep in mind that all investments entail risks. Understanding this fact will make you mindful of every move that you make while investing your wealth.
At times, you can reap huge profits while sometimes you can incur large losses as well. So, it’s important that you determine the required profit and loss limit before investing in any financial investment instrument.
3. Build a Solid Foundation
Investors that are starting out should stick to mutual funds to avoid large losses. The financial option allows you to diversify or spread your risk over different investment instruments. And when it comes to mutual funds, one of the best option, is the index fund, which is pegged to a particular benchmark such as Dow Jones or S&P’s 500 index.
The benefit of investing in the index funds includes low fees. In this way, you will be able to take a large portion of profits in case of a favorable performance of the funds.
Beginner investors often make the mistake of putting all their funds in one or few financial instruments. This is a serious mistake that can easily result in extirpation of the entire investment amount within a few days.
Certain species, such as ducks, lay eggs in the nests of other ducks instead of making a nest themselves. They would lay eggs in not one but several different nests located in different places. So, why do they carry out this activity?
Simple, the more locations they lay eggs the greater chance that the eggs won’t end up being the dinner of a raccoon or other rodents.
You have to apply this same strategy of wise ducks when it comes to investing your funds. By investing your funds across varied asset classes, global markets, sectors and companies, you will be able to minimize the losses that occur due to volatility in a particular segment.
5. Stop Acting like a Sheep
The herd mentality that is the trademark characteristics of sheep may be wise for them as it protects them from predators, but it is never a good strategy when it comes to investing. Leaning more towards the trend is a mentality that is the norm among beginner investors. However, this should be avoided as this would not result in gaining maximum profits from the investment.
The investment decisions should be made after a thorough investigation of the market. This is the only way you can form consistency in your overall investment portfolio.