When it comes to investing money wisely, there’s no one right approach. There are, however, several not-so-wise ways to invest.
Everyone hopes they’re investing money wisely. It’s a safe bet that you’ll never meet anyone who wants to make big mistakes with their investment dollars. For that matter, most of us would love to go through life without making major mistakes, whether that’s in our investment decisions or what we had for dinner last night. That’s simply unrealistic. We all make mistakes and (hopefully) learn from them and work to do better.
That said, we do a lot of not-so-bright things in our lives. Some of them are harmless learning experiences. (It’s okay to admit you’ve watched Sharknado; we’ve all been there.) Others, like big investment mistakes, can cost us enough to trigger severe panic.
What’s great about this is that many investment mistakes are common enough that we can learn from them and work toward investing money wisely. The trick is knowing what those mistakes are.
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• Ten Minutes of reading each week
• Concise recommendation and follow up
• Diverse portfolio and risk management
• Clear instructions on when to buy more or sell
7 secrets to investing money wisely and avoiding common mistakes
1. Check and double-check your buys and sells before you hit the enter button. There are many benefits to investing on your own, and it’s easier than ever, thanks to online brokers. It’s also very easy to make an administrative error that could cost you. One example comes from the first trading day of 2006, when an employee at the investment bank Nikko Citigroup was trying to buy two shares of Nippon Paper for his private portfolio. (Some Japanese stocks are very expensive, and Nippon was trading at about 510,000 yen a share.) He followed all of his employer’s rules and put the order through Nikko’s own trading department…with one small error: his order was put through for 2,000 shares instead of two shares. The compliance department failed to notice that the order (worth about $10 million) was more than 74 times what the employee had in his account. (Spoiler alert: This mistake was eventually worked out.)
2. Keep risk in mind. Many beginning investors only think of the upside, as opposed to the potential loss of money. That often leads to too-large positions and a refusal to get out of losing stocks.
3. Maintain discipline in selecting stocks. Have at least two or three hard-and-fast criteria for stock selection, such as staying with stocks priced north of $10 and companies that have growing sales and earnings. That alone will keep you out of many junk stocks.
4. Stay away from day trading. If there were only one rule to investing money wisely in the stock market, this would be it. Day trading is little more than glorified gambling. We know that the stock market goes up over time. Day to day, you have no idea which direction the market is headed, and individual stocks can be even more challenging to pinpoint.
5. Invest in dividend stocks. Investing in dividend stocks can be a low-risk, steady way to bring regular income into your portfolio. Dividend stocks aren’t solely dependent on their share price rising or falling. When you buy a dividend stock, you know for sure that you’ll receive a steady stream of income.
6. Invest in individual stocks. There’s nothing wrong with holding an ETF or two in your portfolio. ETFs limit your risk while helping you gain exposure to the major indexes and sectors. The problem is that if you only invest in index funds, you’ll never experience the significant gains that you get with an individual stock. Yes, that does come with more risk, so you have to make sure you’re investing money wisely and not just dumping cash into whatever seems like the next best thing. But if you invest in high-quality companies, you can reduce the amount of risk you take on and still experience the big gains. Historically, most successful investors have concentrated their investment portfolios in a few great stocks, and ridden those winners to big profits. That doesn’t mean you should put all your eggs in one basket. Our advice is that, when fully invested, you should own no fewer than five stocks, but put an upper limit at 12 or 15 stocks.
7. Be aware of your risk tolerance. There’s no way around the fact that, even with a high-quality portfolio, there is no way to completely eliminate risk when you invest. Remember, though, that risk is on a spectrum. Penny stocks and day trading come with high levels of risk. Investing in blue-chip companies and dividend stocks is generally low-risk. It’s up to you as an investor to decide where you are most comfortable on that spectrum.
Ultimately, what counts as investing money wisely is up to you. But taking these seven steps will go a long way in helping you decide what that means. Of course, one last bit of advice we can’t skip is to follow us here at Cabot Wealth Network. It’s our job to give you the information you need to make smart investing decisions. There is a lot of free advice on our website and several free reports you can download and read. And when you’re ready, we also offer a wide range of award-winning investment advisories where we share the latest investing information and tips.
What steps do you take in making smart investment decisions and investing wisely? Let us know in the comments.