Friday, November 24, 2017
10 Tips for Investing in the Market
One major reason many people don’t invest in the stock market is that it confuses them. Rightfully so, it can be a perplexing place. My main goal is to demystify the market and get back to basics, making money for long-term growth. I am constantly being asked: “What’s the hot new stock?” or, “What do you think about Bitcoin?” My answer is always the same, “Your guess is as good as mine.” I don’t worry about individual stocks and I don’t chase trends. In this post, I will give 10 tips for investing in the markets. Just a heads up, there won’t be any mention hot stocks or what to buy now. Just simple advice to keep you grounded in the hazy world of investing.
1) Know your risk tolerance
This is very, very easy to do, yet many of us do not know our own risk tolerance. A simple questionnaire will get it done. It is vitally important to understand how you react to market fluctuations. Most people are aware that the market goes up and down. What they don’t know is how it will affect them until they have some skin in the game. Once you start investing it is important to document your emotions as you see your balance change. This will help you adjust your risk tolerance and then be put into fully suitable investments.
2) Are you an Investor, or a gambler
The difference between an investor and a gambler can be razor thin. Here are some characteristics of an investor: Patience, calmness, stoicism, dedication and strength. Here are some characteristics of a stock gambler: Euphoria, depression, shakiness, emotional, fear. Those who are investors have little fear or can talk down their fears because they are able to rationalize what they do because they have a plan. If your only plan is to buy low and sell high, then you have a major problem when it doesn’t go high. Remember that some of the biggest gamblers in the world work on Wall Street.
3) Penny stocks are cheap for a reason
See that stock that only costs 10 cents? If that goes to 1 dollar you can turn your ten thousand into one hundred grand! Ah yes, but if it goes down any more you might lose everything. There is a reason some stocks are so very cheap. It is because they are unproven, unworthy and sometimes just straight crappy companies. Rock solid companies often delay their Initial Public Offering (IPO) because they already have a firm base in place. They want to make the right moves at the right times. Garbage companies need to raise money because they are just an idea without financial backing. Remember that any idea is one swift kick from being in the toilet.
4) Don’t be too trigger happy
I consider myself a novice investor, having only been in the game for about 5 years. During that time, I have seen some of my portfolio dip and some of it surge. During those low times I was thinking, “What the hell is going on here?” Did I make a wrong choice? Should I sell my fund? I decided to hold on and sure enough those low funds rebounded, and I have achieved overall growth. The moral of the story is: Don’t make rash, quick decisions. We all know the market goes up and down. The important thing is to be make regular contributions, so you can take advantage of down periods as well as up. Impulse is Darwin’s Law in the investment world.
Take Advantage of Dollar Cost Averaging – Investopedia
5) Focus on goals and discipline, not gains
I tell this to all my novice investors when they first get started. Most of your gains will come from your contributions and not from market fluctuations at first. Let me break it down. If you have $1,000,000 and achieve an annual 10% return you will see your investment grow $100K. Congrats my friend! If you have $1000 and you get the same return you will see your investment grow $100 during that same year. Congrats again! You might say, “Well it took me all year to make $100, that’s like 30 cents a day!” Yes, but you only have $1000, you need more money to make more money. Don’t think your money will double or triple up quickly. That’s not how things work. When you are saving money, set savings goals, not investment goals. If you focus on savings benchmarks, any investment gain will be gravy. Also, if you’re saving aggressively, you will be rich, that’s a fact.
6) Think long-term
It is tough when you first get started, but you must be in the game for the long haul. The simple “Rule of 72,” states that you should divide your annual interest rate by 72 to see how long it will take your money to double. That means if you have $1000 and you achieve a 10% annual rate of return, it will take 7.2 years to have your money double to $2000. Seems like a long time just to make a grand right? Well, what if you had 100K or a Million? Imagine if you work your butt off and have a Million dollars saved in your investment account by the age of 55. That would mean by the age of 62, your million will double to 2 million. Think long term and you will be richer than you can imagine.
7) Choose tax efficiency
I have said it many, many, many times: Everyone should have a Tax-Free Savings Account. The richest people in the world focus on stability and tax efficiency and so should you. Paying 25% capital gains tax on a stock you bought that grew is not fun. Having it sheltered in a TFSA will make it so you don’t have to pay those high taxes and allow your money to grow without the burden. It is the best and most efficient way to invest your money. Also, don’t discount the Registered Retirement Savings Plan. Many people get mad because they must pay tax on it when they withdrawal. Remember that the RRSP is tax-deferred, meaning you never paid tax on this money in the first place. The government will always get their piece, with the RRSP they get it later and far less than they would have if you didn’t invest.
5 Tax-Advantaged Places to Park Your Money – Budget Boss
8) Diversify
Don’t put all your eggs in one basket. You should never be fully invested in one stock, one fund, one house, one country, one sector or one anything. If all your money hinges on the performance of one thing, then when that goes down you could lose everything. Ask the people of Enron and Nortel. Diversifying helps mitigate risk and grow your money efficiently.
9) Avoid Leverage
What is leveraging? Leveraging is when you borrow to invest. In my opinion you should never borrow to invest unless it is in a guaranteed product. Sadly, there are not many products out there that have guarantees big enough to provide you with a return large enough to cover the interest on the loan. The only thing I can think of that you can borrow for as an investment, is a house. A home usually appreciates in value and has the added bonus of the fact that you can live in it. We all have to live somewhere and most of us don’t have a few hundred thousand laying around, so borrowing for a home is necessary. Losing your money is one thing. Losing it and going bankrupt because you owe someone money is another.
The Risks of Leverage – Retire Happy
10) Control your emotions
Investing can be emotional, believe me I know. But you have to understand that it is the emotional that lose in the end. Gordan Gecko from the movie “Wall Street” said: “Bears and Bulls make money, and sheep get slaughtered.” Sheep get slaughtered because they are following trends and doing what everyone else is doing. Warren Buffett said, “If everyone else is selling, I’m buying.” Having a stable job, with a stable pay, saving money, staying within your budget every month, not going into costly debt and investing regularly will make you wealthy. Getting emotional because of one bad month and then making a rash decision could cost you a lot of money.
Thanks for tuning for Market Week at Budget Boss. Join us next week as we jump into another topic that will help you on your personal financial journey. Shoot me a message at joe@budgetboss.ca if you have any investing questions or want to get started with your own savings program. Have a great weekend friends!
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” – Warren Buffett
Email – joe@budgetboss.ca
Follow Budget Boss on – Facebook LinkedIn Twitter Instagram Pinterest Quora