Here are 5 things I believe are important to know when you start investing. Knowing these things will prevent you from making mistakes that costs money. Investing is a skill, and it is important to approach it as such, why? because then it means You can learn how to do it properly and all you need is just the right information and understanding... so here are things that are important to understand... (these are tips I use on my own investing as well)
Tip #1 - Know your Investment Goal
There are really only 3 goals when it comes to investing. These are
1. Capital Preservation, which is investing with the objective to save and protect your money from being lost. Furthermore, capital preservation can relate to maintaining the buying power of your money. This means that you want your money after the investment period to hold the same value it did as when you started investing. Think of it like this, R100 ten years ago could buy you a lot of things that today it cannot buy, so you might want to just invest to ensure your money in the future can buy you the same things it could when you started investing. (the typical "Buy and Hold" approach works here)
2. Capital Appreciation, this is investing with the sole objective of growing your money. You want to see the value of the money you have invested grow and become more. Essentially with this approach you buy assets that you believe will grow in value much more than others in the market. You are also willing to take on more risk to achieve this goal and are willing to accept some losses as part of the plan. (the typical "Buy Low, Hold and Sell High works here)
3. Income Investing, this is an approach with the objective of generating returns that are converted to income, income that the investor plans to use to pay for things in their life. This is often an objective that people have but do not understand what styles of investing are required to achieve it. (the typical "short-term trade" works here)
Your whole investment portfolio can be based on just one of these goals or individual investments can be based on different goals. Simply put you have to know why you are Buying something before you buy it (before investing). This will enable you to properly assess if the investment is achieving the goal set out for it. More importantly, you will know which investments (assets to buy) to make or not because not all shares, ETFs etc are for the same goals.
Tip #2 - Do Research first, always
Investors who lose money tend to have one thing in common and that is they do not conduct their own research. They are lazy and prefer to copy other people, worse they copy people on social media. You have to do research before you buy a share or whatever else. Your research must include what is going in the economy, understanding the business or asset and predictions about its future value.
When people speak to me about their struggling portfolios, I always ask them "why did you buy that", the answer quickly reveals that they did not have a reason to buy it and if you do not have a reason to buy it then you should not be investing in it.
The goal of research is to give you information that will help you predict what is going to happen in the future and so be able to make a decision.
"Never invest in a business you cannot understand." – Warren Buffet
Tip #3 - Split your investments properly
Do not put all your eggs in one basket. It is important to split your money into different investments. It will help you manage risk better and force you to do more research as you have to find more investments to put your money into. A rule I follow is only put 2% of my overall portfolio into a single investment. You can create your own rule as well. The objective of the rule is to make sure that you never worry about one investment ruining your investment portfolio.
Tip #4 - Have a clear timeline
You have to know by when you expect to see results from your investments. Knowing this will help you keep a calm head in the market. People who do not have a timeline quickly panic because they do not know the path of the price of the investment. Prices go up and down on a daily basis but slowly increase over a particular timeframe. If you do not have a timeline, you will see one price drop and sell too early.
Having a timeline also relates to research, it helps you figure out by when will you know your investment decision is correct or incorrect (remember investing is really all about predicting the future). Most of my investments range from 3 months to 5 years, then there are those I plan to hold for over 20 years (yep, you read that right)
Tip #5 - Improve your Skills
As I said in the beginning of this blog post, Investing is a skill and it one you can improve over time. So as a beginner you must focus on improving your skills. Take time at least once a month to sit and watch YouTube videos, spend time Googling and learn more about investing. The main reason people do not succeed is simply because they do not know how. That is a challenge that is easily solved by learning.
My final thoughts...
The difference between making money and losing money is what you know and how you use what you know. Thus avoid the mistakes that cost you money by improving what you know.
Take these tips and apply them.
Happy Investing
-Omega
Remember: Opinions expressed in this article do not and never will constitute financial advice. Every person's financial situation is different, I recommend you speak to a financial adviser about yours
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