There is no better way to be a successful investor than to manage your own investments. With control over how you invest you not only reduce costs, but also gain knowledge and wisdom over time. Yet, investing isn’t often taught in general education, so most people aren’t aware of the most important factors to consider when it comes to managing their own investments.
Before investing there are several things you should consider, all of which have their own importance in the investment process. Being prepared with these skills will go a long way to making you a successful investor.
Invest in what you understand
Beginning at the absolute minimum, you should always understand your investments. You don’t necessarily have to be an investing expert, but if you don’t understand where you are putting your money, you’re asking for trouble.
You should first understand how an investment works. If you are investing in a stock, understand the terminology that goes with the stock market, like bid/ask price, spread, bull, bear, and other commonly used phrases. If you are investing in bonds, make sure to know what someone is referring to when they mention the coupon rate or interest. You should know these common terms like the back of your hand before getting involved in these asset classes.
Next, it’s a good idea to have a firm grasp on how economic conditions and geopolitical news will affect your investment. Does your investment do well when the market is booming? Does your investment hold water when news is released of a political or economic crisis? How do oil prices affect your investment? After you identify a potential investment make sure you understand how this investment will fare in any situation. The last thing you want is to be surprised by a news event that negatively impacts your investment in a way you were not prepared for.
Don’t invest money you could need, especially in low-liquidity assets
Contrary to popular belief, it’s not always a good idea to invest your money. Often times your money is better suited to being saved or paying down outstanding debts. This is because with any investment there are associated risks, whether it be large or small, which could cause potential losses if you are not careful. Before you ever invest, it’s always a good idea to have an emergency fund for unexpected expenses. You always want to ensure that no unexpected event will cripple your financial well being and ability to pay your monthly expenses.
It’s recommended that you always have at least 6-months of living expenses saved away in an emergency fund, just in case. These funds could be kept in a savings account, or, in a faster liquidity investment like Go & Grow from Bondora. Go & Grow gives you the best of both worlds for your emergency fund: high liquidity to convert your money into cash the second it is needed, and a solid return rate* to grow your emergency fund.
Paying off credit card debt is another area that should be prioritized over investing. Say you have outstanding credit card debt that is accruing 15% interest every month. Since you are losing money every month as a result of the interest, any money you have saved should go toward paying down your debt before investing.
This makes liquidity a key factor when making an investment decision. Liquidity is the ease of which you can turn any investment into cash. Stocks have high liquidity because it is easy to sell a stock and turn it into cash if needed, but real estate has very low liquidity because it takes significant time to sell a property and come out with your earnings in cash. Therefore, you shouldn’t invest in an asset such as real estate if you may need that money in the near future.
Don’t get caught up in the hype
Remember back to the beginning of the new millennium? As the clock struck midnight on New Year’s Day in 2000, the general public was overjoyed at the new internet-based economy which was sending markets to all-time highs. It seemed there was nowhere for dot-com companies to go but up.
Had you got caught up in the dot-com bubble at the time you would have lost significant sums of money. Companies like Pets.com, AltaVista, and Palm all seemed like can’t miss opportunities at the time, but the truth was far more scary. Investors got caught up in the hype and ignored the fundamental truths underlying these investments. Dot-com companies were hemorrhaging cash at a record pace, weren’t generating enough revenue to cover their costs, and still had inflated stock prices well above their intrinsic value. It was directly due to the hype that these stocks came crashing down in the early 2000s.
If you want to avoid mistakes like investors in the dot-com era, forget about what is being hyped and stick to what you know. This doesn’t mean you can’t invest in a new, promising technology. It simply means that before you consider such an investment, do your due diligence. Don’t just invest in anything because you are starting to hear about it on the news or in popular culture. Invest because it’s a smart and well thought out decision.
Diversify: this is finance 101
The factor of portfolio diversification can’t be overstated. Time and again experts and research have both found that a diversified portfolio is one of the biggest factors to successful investing. Diversification protects you in any market situation because you are less exposed to fluctuations in price and market instability as a result of unexpected changes in the global economy.
Kent Insley, chief investment officer at Tiedemann Advisors notes that investments rarely move together, which is why at the end of the day diversification wins out. “It’s very rare that any two or three assets with very different sources of risk and return, like government bonds, gold and equities, would experience declines of this magnitude at the same time,” says Insley. Meaning, if the stocks in your portfolio all of a sudden lost 20% in their value, other assets in your portfolio (such as gold, bonds, etc.) would counterbalance the losses.
Diversification is key within each asset class itself. For instance, if you are investing in the stock market, you should not only invest in several different companies, you should invest in companies across a wide range of industries. If you are investing in p2p loans, you should invest not just in a single loan, but many loans to spread out your risk.
However, some people only see diversification from a very narrow perspective. To diversify your financial portfolio doesn’t just mean to buy an array of stocks in different industries (which is a good idea in and of itself), it also means to invest in all different kinds of asset classes. This includes stocks, bonds, cash, gold, and alternative assets like p2p loans and cryptocurrencies. All of these asset classes should be explored and investments should be strategically made to diversify your holdings across the board.
Keep an eye open, track/monitor
There is a line between being diligent with your investments and watching them like a hawk. Too little oversight and you won’t have any idea what your investments are worth and when to rebalance your portfolio, moving money in and out of investments as needed. On the flipside, examining your investments on an hourly basis will drive you crazy. Each up and downswing of your investments will drive you through ecstasy and agony, leaving you emotionally drained and unable to make unbiased decisions when needed.
There are several things you can do to maintain a watchful eye over your investments without going overboard. Sign up for a newsletter or daily digest concerning the markets you are invested in, watch or read commentary on financial news sites and television channels, or set up mobile alerts for when investments reach a predetermined price. Or you can use a service like Mint or Morningstar to track your portfolio and its change in value over time. These things will help you oversee your investment portfolio and be ready to jump into action when needed, whether that be taking profit off the table, or jumping into an investment that has finally dropped in price.
Control is key
By managing your own investments you ensure control over your own financial future. You don’t have to be an economic savant to invest on your own, you just need to be prepared, do your research, and take the time to invest wisely. Why pay fees to a financial advisor or another professional when you can take control of your own financial destiny?
*As with any investment, your capital is at risk and the investments are not guaranteed. The yield is up to 6.75%. Before deciding to invest, please review our risk statement or consult with a financial advisor if necessary.