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Become a Successful Investor in Six Steps

My Strategic Dollar Building Wealth, Guest Posts, Investing 12 Comments

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Today, I’ve got a great guest post from Steven over at Credit ZealSteven is a professional personal finance writer. He is a contributor for several professional finance sites. His work has been featured on USA Today, The Huffington Post, Benzinga, Investopedia and many other publications. He also has his own personal finance blog, Credit Zeal, where you can follow him. Enjoy!

How to Become A Successful Investor – Introduction

Investing is something that is becoming more and more necessary as our economy changes, finances become less secure, and simply because it is impossible to know what is going to be waiting for us just around the corner.Thankfully you don’t have to be a financial expert or an investment professional to invest your money properly. Successful investors simply learn to minimize loss and maximize gain.

Here are six principles to help you succeed in investing.

Grow your Wealth with Long-Term Compounding

It is a great idea to start investing with the thought of a rolling snowball stuck in your head. The longer you leave your money in an investment, the more potential it has to grow over time.

Just think about this.

Investing $10,000 with an annual rate of 8 percent means that in 25 years your investment will benefit from a 47% gain and end up equating to $68,485.

This is assuming that you make no withdrawals and simply leave your investment as is. Better yet, wait 30 years and that same $10,000 will have turned into $100,627.

It’s easy to see how lenders end up making a lot of money, isn’t it?

This is just a simple and easy to understand example and doesn’t factor in taxes and other factors, but it is a powerful illustration of the benefits of long-term compounding. There is no need to attempt to hit a proverbial home run with all of your investments.

Long Term Gains From Short Term Pain

Many financial experts will point out the benefit of riding out market fluctuations. But waiting out the market is easier said than done. What if you have $25,000 invested in the stock market and your stock starts to drop like a roller coaster? You can easily see how much money you are losing and it can be next to impossible to ride it out.

The market can be a scary place, but before you yank your money out, try to remember two important things:

  1. The longer you stay with your investments, the less risk there is involved.
  2. Even during volatile moments there are certain investments that still hold steady. If you aim for long term goals then you will find there is a lot less fear involved with investing.

Diversifying your portfolio can also help you withstand some of the impacts of a falling market.

Utilizing Asset Allocation

Asset allocation can be described as the process of spreading your money over a number of different categories including bonds, stocks, cash, metals, collectibles, cash, real estate, and so on. Your basic asset allocation would usually consist of investments such as mutual funds, stocks, bonds, or cash alternatives.

This type of investing is important for a number of reasons. Experts tell you that allocating your money across asset classes is the best ways to reduce portfolio risk over time. Thus, I recommend spending more time deciding how to allocate your funds across classes and less time picking individual company stocks.

On top of that, by investing in different asset classes, you will be able to minimize losses because it’s highly unlikely each asset class will plummet at the same time. Generally, when assets in one class are struggling, other assets in other classes should be flourishing. That mixture of market forces can make it a lot easier to stand pat when the market is falling.

Liquidity and Investments

Liquidity is the speed in which you can turn your investments into cash without losing your principal investment. A general rule of thumb is to avoid investments with fluctuating price movements if you are going to need the money sooner rather than later. If you know you’ll need the money in a few months, then avoid tying it up in a long-term investment.

If you know you’ll need your investment money within a few years then stick to a savings account, short term bonds, or certificates. You’ll earn a lower rate of return but you’ll have peace of mind knowing that your principle investment is safe and available when you need it, without the possibility of losing the principle if you had invested in a riskier vehicle.

Become a Successful Investor in 6 steps - pinterest pic

Investing Often and on a Consistent Basis

Dollar cost averaging is a form of investment where you purchase a fixed amount of mutual funds or stocks over a certain period of time. The money you invest remains the same over time.  When prices of the investment are high you will purchase less units, but when the prices are low you will purchase more units. In the end this usually means that you get a lower average share price than you would by just buying a certain number of shares at scheduled intervals.

Just as with any other investment, dollar cost averaging isn’t guaranteed. Before utilizing this method consider your ability to continue to invest, specifically if the market is down.

Investing is intimidating and many people like to leave the dirty work to the professionals.

You don’t need a degree in finance or work for a financial institution to understand how to maximize your investments.Click To Tweet

Keep reading, inform yourself as much as possible, and be patient, and you will be rewarded financially.

Comments 12

  1. Quick note on DCA vs. lump sum; pretty sure the math nerds over at Bogleheads lean in favor, mathematically, for lump sum actually performing better than dollar cost averaging. I haven’t read up enough on it to substantiate this comment much more than that, but it’s worth a read.

    HOWEVER, with that in mind, DCA is still good. I think the biggest thing whenever you’re talking about investments is to not be afraid of the market – and that’s a big thing to get over. Yes your investments may go down. They may lose a lot of money. But if you invest in things that are unlikely to lose ALL of their value (as opposed to something like penny stocks) you should be able to ride out the storm.

    The folks who benefited from the 08-09 crash were those who invested more, and those who rode out the storm…not the ones who got scared and pulled out.

    Good guest post!

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      Author

      Excellent points! I think that the last point is the main take away for me. Continuing to invest, not being afraid of the market and riding out the storm will keep your investments growing!

    2. Hi Dave,

      Yes, you’re spot on! You always want to take a long term approach. One example is how Warren Buffet invested $5B in Goldman Sachs back in 2008 and has done extremely well from this investment.

  2. These are all GREAT points!

    My husband and I are trying to teach a younger friend about investing since he’s new to it and just graduated college. He put a little bit of money into the stock market and has been essentially “day-trading,” but he gets extremely anxious watching the stock market. He’s trying to make a quick dollar wherever he can and we have tried to explain to him it’s not quite that easy.

    Long-term compounding and sticking with the market (even in times where it is painful) aka PATIENCE is key. Not that one can’t make money off day trading, but it’s much harder to do that and oftentimes you end up trading too early and missing out on an additional increase or more money.

    I think a lot of people don’t invest for that exact reason. People want that instant gratification and when it comes to making money, that’s few and far between.

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      Author

      You’re so right! I’m glad you’re teaching your younger friends that day trading is SO stressful and just not worth it. Changing the future! 🙂

    2. Thanks Courtney. Yes, not many people have the patience to stick with a long term view and invariably become frustrated and take there chances on short term “investments” which more often then not fail. As Warren Buffet famously said “Rule number one: Don’t lose money. Rule number two: Don’t forget rule number one.”

  3. I think one of the hardest things for me was staying patient and the element of time. I wanted my portfolio to grow as fast as possible but sometimes staying the course and allowing it to grow slowly will actually make it grow fastest, especially when you’re not trying to time the market like I was 🙂

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      Author

      Yep! Patience is one of the hardest things for me as well. I try to trust in my analysis and the process.

  4. Great list of rules to follow. Stay focused on the long term. It is best to tune out the day-to-day ups and downs of the markets. Establish an allocation that you can live with and keep adding to it with every paycheck.

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      Author
  5. These are all such great tips! I would say that the biggest thing is START NOW! The sooner you start, the sooner you can start accumulating that interest. Then, if you follow the “Investing Often and on a Consistent Basis” and analyze what’s doing well vs what’s not, you’ll be wayy ahead of the game. Great post!

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      Author

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