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7 Investing Tips Used by the Pros
The global financial markets can be difficult to navigate. Each day, investors monitor the fundamental indicators and technical trends in order to predict future price movements of financial assets. As the boom-and-bust nature of the financial markets have clearly demonstrated over the years, it’s not always easy to trade successfully.
Luckily, on the subject of investing, the pros have taught us a lot over the years. Many of their “secrets” are very intuitive, but not always implemented due to the emotional aspect of trading. The following list is a good starting point for novice traders, as well as a reminder for experienced investors who have lost more than they’ve made in the market.
- Know What Kind of an Investor You Are
Understanding the type of investor you are is just as important as the financial assets you choose to buy and sell. That was the message of globally renowned economist and professional investor Benjamin Graham, who in 1949 authored The Intelligent Investor, which is still considered the Bible of value investing. Graham told investors they need to know what type of investor they are – defensive or enterprising. The difference simply boiled down to how much time and energy an investor had to devote to the financial markets.
Those with less time (defensive or passive investors) will minimize their risk exposure and stick to assets that allow them to benefit from all areas of the market. Those with more time (enterprising or active investors) will put in more work into researching and analyzing the markets. After all, the more work you do, the higher your potential return should be.
- Know Your Plan, Stick with It
Understanding why you are investing and having clearly stated goals are just as important as knowing whether you are a passive or active investor. Every investor should have an end-goal in mind. Are you saving for retirement, investing in your children’s education or trying to earn an income from trading? Having clearly stated goals is the first step to building wealth through the financial markets.
- Consider Cost as Well as Return
Investors are often so distracted by potential returns that they fail to look at how much it costs to buy a particular asset or fund. Expense ratio, fees paid to managers, transaction costs and load fees should be considered alongside the potential returns.
- Diversify
Diversification – the process of minimizing risk exposure in order to maximize returns – is a cornerstone of investing. Putting together a well-balanced portfolio of assets – index funds, stocks, bonds and even precious metals – may allow you to hedge against market volatility. This is especially true in today’s investing climate, which is characterized by economic and geopolitical instabilities, as well as unpredictable business cycles.
- Don’t Try to Beat the Market
Trying to make a better return than the market average has gotten many investors in trouble over the years. This concept of “beating the market” has also produced several investment specialists and trading strategies promising to outperform the major market averages such as the Dow Jones or S&P 500. Regardless of how persuasive their arguments are, trying to beat the market rarely pans out over the long-run. This doesn’t mean investors shouldn’t try to maximize their returns. They most certainly should, but not at the expense of sound investment strategies. Expecting to beat the market with every asset you purchase will only leave you disappointed. In the worst case, it can leave you chasing after financial assets for the wrong reasons instead of carefully considering their intrinsic value.
- Save as Much as Possible
Some of the world’s best investors are also meticulous savers which allows them to put more money into their investment portfolios. They follow the advice of legendary investor Warren Buffett who states: “Do not save what is left after spending but spend what is left after saving.”
- Minimize the Tax Burden
As an investor, chances are high that you will pay taxes on capital gains, foreign investments, interest-bearing investments and dividend-paying investments. Depending on your jurisdiction, you should consider ways to minimize your tax burden. Tax-free savings accounts, employer-sponsored accounts and other tax-deferring accounts should be leveraged as early as possible. The idea isn’t to dodge your tax obligations, but to better position your tax-efficient investments in appropriate accounts to get the most out of your investment capital.
Final Considerations
There are no foolproof “secrets” to becoming a successful investor. While technologies like the internet and social networks have made investing much more accessible, the same rules for wealth creation still apply. Discipline, practice, knowledge and goal-orientation are the only recipes that will give you a lucrative investment portfolio. Mastering the list above will allow you to capitalize on the global financial markets and the incredible opportunities they offer.
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