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Today, I’ve got a great guest post from Steven over at Credit Zeal. Steven 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:
- The longer you stay with your investments, the less risk there is involved.
- 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.
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.