Simple Lessons in Investing We All Need to Know

Simple Lessons in Investing We All Need to Know
  • Opening Intro -

    In a nutshell, investing is buying something high with the intention of selling it later at a higher price than what you paid for it.

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But while the premise to investing is simple, actually making consistent returns on investment is a completely different matter. Fortunately, investing isn’t rocket science either.

Armed with these seven investing lessons, you can protect your capital better while also allowing it to work for you:

Cut Losses Quick

Being hopeful may serve you well in life, but it’s a detrimental quality to have as an investor. Holding a losing position, whether it’s a stock, commodity, currency, or real estate, in the hopes of it rebounding back to the other direction and you making some money off it will oftentimes lead to even bigger financial losses, not to mention a great deal of stress and frustration as you watch your hard-earned money dissipate into thin air.

Before you take on any investment, set a limit on how much you are willing to lose, either in dollar amount or as a percentage of your account.

Don’t Expect to Make Millions Overnight

How quickly your investment account grows depends on a variety of factors, including account size, market volatility, risk management parameters, investing frequency, etcetera.

If you have $10,000 in your investment broker account, you can’t expect it to grow twofold overnight or even in a span of a month.

In fact, according to a report published in Financial Peace University, theaverage return on investments between 1923 to 2016 was a little over 12%.

Don’t Try to Guess Exact Entries/Exits

Trying to predict exact entries and exits for every position you take in the market can hurt your returns more than it can benefit you in the long run.

It causes a greater deal of stress and frustration and puts you in a position to lose more in the event that your predictions are wrong.

Let institutional investors, including top hedge funds, assume stakes in the market before you start putting in money yourself. This will give your position the momentum it needs to start profiting.

Prioritize Value Over Price

Picking investments based solely or mainly on cost may sound like a smart strategy since getting in at a lower price point means being able to sell the position for a much larger profit in the future.

However, for an asset to consistently increase in value, it needs to have a value proposition, whether it’s an innovative technology, a significantly lower production cost, or the lack of comparable product or service alternatives.

Don’t Just Buy Because Others Are Buying

Buying into a position just because everyone else is might pay off once or twice, but it’s an overall poor approach to learn how to invest. Acting on so-called hot tips from economic pundits and financial advisors without doing the research and analysis beforehand can be risky. Make sure to perform due diligence on a company, commodity, currency, or real estate before you actually bet on them.

Manage Risk at All Times

In the pursuit to make every dollar they can, novice investors expose their capital to a great deal of risk. They don’t set stop losses or profit targets, trade too often and in every direction, and max out the available leverage that their broker offers.

As a result, they sustain heavy losses and blow their account up in a matter of months. As mentioned earlier, always set a predetermined stop loss and use only a fraction of your available capital for each position taken.

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Only Use Money You Can Afford to Lose

This is perhaps the most important tip every investor should heed. Never put money into a financial market if you need it for an upcoming expense, such as your monthly rent and utilities or college tuition.

If you have any debt, such as a mortgage or credit cards, that you need to pay off every month, make sure you allocate a portion of your take-home pay towards that debt before you invest any money. Investing, even if meticulously planned for and precisely executed, can still have an unpredictable outcome.

Final Thoughts

Learning these simple lessons, in theory, is easy, but actually practicing them on real-world market scenarios can be a daunting process. Consider opening a demo account to help you practice proper risk management measures, explore technical strategies, and refine your overall investing approach.

Image Credit: simple lessons in investing by envato.com

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