The biggest misconception about investing is that it’s reserved for the rich. But there are plenty more myths out there to be aware of. Here’s our top tips on what to lean towards, and want to try and avoid, when investing for the future.
So you want to invest in stocks, but you don’t know where to get started.
That’s okay! We understand that it can be intimidating at first. But there are many things you can do—both as a beginner and as an experienced investor—to help increase your chances of success.
While it’s best to begin investing early in life, it’s never too late to start. If you’re new to the world of investing, it can be difficult to know where to begin. Fortunately, investing for the upcoming year does not have to be difficult. Check out Johnson Wealth and Income Management’s top 5 investing do’s and don’ts below.
DO: Get Started Early
Investing early in life is one of the best things you can do for yourself. Why? It’s simple: time is on your side.
In fact, when you invest early, you’re getting the opportunity to help grow your money over a longer period of time. This means that even if you make some losses at first, you’ll have more time to recover and help get back on track with your investments. It also means that if the market continues to grow over time (which historically it has), then your investments will be able to grow even more than if you had waited until later in life to start investing.
The sooner you start investing, the better off you’ll be in the long run—and that’s why we encourage everyone to start as soon as possible!
DO: Have an Investment Goal
If you are planning to invest money in the stock market, it would be advisable to have a clear investment goal. This will help you plan your investments (and monitor your progress) better. For example, if you want to build a retirement fund, you can invest in mutual funds that offer attractive returns. Having a goal will help keep you motivated and on track with investing.
DO: Build a Stock Portfolio
Building a portfolio of stocks is a great way to diversify your investments and help maximize the amount of money you can make from the market. However, it’s important to keep in mind that having just two or three stocks isn’t enough to make consistent money from the stock market.
And while it’s very unlikely that you can find all fantastic stocks to invest in at once, year after year you can keep adding/removing stocks to build a strong portfolio that can help you reach your goals.
DO: Diversify your Portfolio
Diversification is one of the most important things you can do to help protect your portfolio. It’s tempting to want to put all your eggs in one basket—to invest all your money in one stock or just a few stocks, in the hopes that you’ll make a killing when they skyrocket. But the risk involved with investing in just one stock is often much higher than if you had a portfolio of ten stocks. Even if one or two of them start performing poorly, it probably won’t affect the entire portfolio too much.
When it comes to diversification, less is more! Your stock portfolio should be sufficiently diversified so that even if one or two stocks aren’t doing well, the rest will offset those losses.
DO: Invest for the Long-term
If you want to help build wealth from the market, invest for the long haul!
It’s a common fact that veterans of the stock market who made an incredible fortune from stocks are long-term investors. But why does long-term investing help to build wealth? Because of the power of compounding, wonderful, fruitful compounding.
Compounding is when your money helps earn interest on its own interest. It is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one. The total initial amount of the loan is then subtracted from the resulting value.
Calculating compound interest looks complicated, but it’s actually as simple as plugging some numbers into the right formula. The formula for calculating the amount of compound interest is as follows:
- Compound interest = total amount of principal and interest in future (or future value) minus principal amount at present (or present value)
= [P (1 + i)n] – P
= P [(1 + i)n – 1]
Where:
P = principal
i = nominal annual interest rate in percentage terms
n = number of compounding periods
Take a three-year loan of $10,000 at an interest rate of 5% that compounds annually. What would be the amount of interest? In this case, it would be:
$10,000 [(1 + 0.05)3 – 1] = $10,000 [1.157625 – 1] = $1,576.25
As beneficial compounding interest can be for savings, investments, and wealth creation, it’s important to note that it can work against you if you’re paying off debt. In fact, compounding is part of what makes carrying an outstanding credit card balance so costly.
Now that we have an understanding of what to do when it comes to investing, let’s get into the don’ts.
DONT: Have Unrealistic Expectations
The market is full of stories about people who’ve made huge amounts of wealth on their return on their investment. But the truth is, these kinds of stories get spread around quickly, and they’re often inflated to make them sound more impressive than they actually are.
When you begin investing, you should always have realistic expectations. A return between 12–18% in a year is considered good in the market. Moreover, when you compound this return over multiple years, you will get higher returns compared to 3.5% interest on your savings account.
It can be misleading to think you can see the same profits as someone who has been investing for years. With time, patience and professional guidance, you can help get similar returns, but only after enough knowledge and practice.
DONT: Take Investing as Gambling
Investing is not gambling. Investing is a long-term strategy to build wealth and grow your assets, whereas gambling is a short-term game of chance that can end up losing you money.
In the stock market, you don’t have to guess at what stocks are going to do—you can find out exactly how well they perform over time by looking at their historical price data. You can also get an idea of how much risk each stock has by looking at its volatility. If you use this information about past performance and risk when making investment decisions, then you will be able to make informed choices that will help lead to better outcomes overall.
DONT: Be a Follower
Don’t be a follower.
It truly is a tale as old as time. Let’s say your colleague buys a stock, and it’s been performing really well. Now, he’s boasting about how much money he’s made from it, and you’re interested in making money too. So you go out and buy the same stock.
But here’s the thing—you’re not going to get anywhere significant in the market by following the herd. It’s always in best practice to go out and do your own research! Don’t rely on what other people are doing—do some digging yourself, and find out if that stock is worth buying. The early bird catches the worm, so don’t be an investing sheep that follows the crowd.
DONT: Make Emotional Decisions
The majority of the time, we tend to make decisions based on our emotions. Maybe you really like a company and want to invest in it because it makes you feel good. Or maybe you’re scared of making an investment because you don’t understand how the stock market works.
The thing is, the human mind is very complex and there are many factors both internal and external that can affect the choices we make. When it comes to investing in the stock market, it’s important not to make emotional decisions. No matter how much you like a company, if it is not profitable and doesn’t have a bright future potential, it may not be the right investment decision for you.
DONT: Over Trade
If you’re doing a lot of trading, it’s easy to get caught up in the excitement of making a profit. However, if you don’t take a moment to consider your trades and how often you’re actually buying and selling, then there’s a good chance that you’ll be paying for it later on.
When you’re trading frequently, you’re paying fees every time you make a transaction. Not only does this add up over time, but it also means that your money is tied up in the stock market for longer than necessary. So what’s the solution? Make confident decisions about when to buy or sell and only make transactions when necessary.
Bottom Line
When it comes to investing, there is no handbook or manual to follow. There are simply suggestions you can take to help you learn how to strategize in the long run. Investing is one of those things you have to physically do in order to get better from it. One of the best ways to invest is to seek professional help.
At Johnson Wealth and Income Management, our Fiduciary advisors are here to help you, every step of the way. We specialize in money management and can provide you with the tools you need in order to be a more confident and successful investor.
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