How to Avoid Major Losses in Equity Investing?

It is quite easy to fall prey to market fluctuations and make unprecedented losses in investment. Wealth building is important for everybody; it is not enough if we have sufficient money today, the future counts as well. Investing in the equity market is perhaps one of the most lucrative ways of going about this. It is a fact that there are several avenues of making money, but investing in equity is considered best among them. Following some simple tips will help you steer clear of losses and maximize your gains over the long run.

  • Never rush into an investment. Always make informed decisions. If you are looking at short term investments (where you want to retrieve your money in less than a year) then choose debt products (such as debt mutual funds). In this case, the risk is less but so are the returns.
  • If you want higher returns, then choose a long term investment such as the stock market.
  • Beware of fraudulent companies. Not all the “upcoming” companies you come across are genuine.
  • Buying high and selling low are the most commonly made mistakes. Do not Panic; in fact you just need to do the opposite.
  • Do not believe superstitions or word of mouth when it comes to investing.
  • One fundamental rule to remember: never borrow money or take a loan to invest. The surplus you have left after all your expenditures is what you should use for investing instead of splurging it unnecessarily.
  • Stock market is not a game of gambling- it is very much an investment to fulfill your financial goals
  • Avoid day trading, use your common sense and don’t get too greedy.
  • It is always advisable to seek professional help, provided they are reliable.
  • Go in for a systematic investment plan [SIP] – which helps you save regularly and with discipline.

You can definitely control your investments, but you can’t control their performance. Once you understand that, you are well on your way to wealth generation. It isn’t just about increasing the value of your finances, it is also about improving your credit score and credit records so as to be able to avail loans easily and secure your financial future.

No amount of speculation can help you get more gains, it is only a tentative calculation you will have to go by. But, the advantage is that the more patient you are and the longer you invest – you will be rewarded well and be able to achieve all your financial goals.

12 Principles to Successful Long-Term Investing

The principles of successful investing are simple to understand but not duplicated very often. See why, many investors don’t achieve the success they deserve.

Principle # 1 – The Goal of Long-Term Investing

The goal of long-term investing isn’t to provide you security today, but to earn you real, inflation adjusted, long-term returns for the future.

Principle # 2 – Compound Interest Is Your Best Friend or Worst Enemy

Ask anyone older what they wish they had done at your age, and the answer is usually, “I wish I began investing for retirement.” Why not let your investment portfolio experience the magic of compound interest itself, instead of imagining the possibilities.

Don’t forget that compound interest can also be your worst enemy. Investments are not the only thing that compounds, so does debt.

Principle # 3 – Investing Isn’t To Be Confused With Gambling

If you apply the principles of investing, risk tolerance, time horizon, and asset allocation, you can have a fairly close assumptions of your returns. There isn’t a lot of risk.

Strategies like trying to time the market, buying and selling individual stocks, selling options, are not investing, they are gambling.

Principle # 4 – Successful Investing is a Passive Activity

Investing is as fun as watching paint dry. The rewards tend to be a little better, although.

Making more trades or paying more attention to news, will not make you a better investor.

Principle # 5 – You Should Never Begin Investing Without Goals

If you don’t know why you’re investing, you should not be investing.

Principle # 6 – Risk Tolerance Matters

I have seen it over and over again, overstating your risk tolerance will cost you more in the long run.

It’s easy to say, you enjoy risk because it’s likely to give you a higher return. What’s hard is staying the course when the market drops 50%.

Principle # 7 – Control Only What You Can Control, Don’t Worry About The Rest

You can’t control what the market does from day-to-day. Don’t worry about what you can’t control. It will only cause you stress and money.

Take time understanding the things you can control such as expenses, taxes, risk tolerance, and asset allocation. This is what you need to take the time to understand.

Principle # 9 – Taxes Matter

When you’re saving for retirement, accounts such as a Roth IRA or 401Ks will always out gain the same investment in non-tax advantaged account. There is no reason, why you should be investing in anything besides these accounts for retirement.

Principle # 10 – Costs Matter

Invest $5,000 per year for from the time you’re 25 to the time you’re 65 into a Roth IRA, earn 10% a year, and you will have accumulated $2,434,259.

If you earn just 9%, the difference between paying a 1% fee, you will have earned $1,841,459.

Costs matter!

Principle # 11 – Most Investment Magazines, Newsletters, and Television Shows Are Meant to Sell Advertising, Not Provide Quality Investment Advice

Why else would BusinessWeek in April, 2008 advise you to buy Lehman Brothers stock? Yes, that’s the company that went bankrupt a few months later.

Principle # 12 – Listen to 3 of The Greatest Investor’s of All Time

  • Warren Buffet – “The best way to own common stocks is through index funds.”
  • Peter Lynch – “Most individual investors would be better of in an index mutual fund.”
  • David Swenson – “You belong at the other end, with a portfolio exclusively in index funds with low fees. If you’re not going to put together a team [of 20-25 investment professionals] that can make high-quality decisions, your best alternative is passive investing”

Three Investing Myths To Unlearn Before Investing

I am sure you have heard this axiom: If you don’t know where you are going, you will get there. Many folks investing today are on that path: they are investing without proper knowledge of the stock market, of investment basics, and lacking simple, concise, written goals. Later, these folks will experience great challenges.

Among other things, the Federal Reserve’s Quantitative Easing program, a euphemism for pumping money into the economy, is fueling rising stock markets. This could entice even more folks to invest in stocks because they might see opportunities to ‘make money.’ Beware; before investing, at least, ensure you dispel three popular investment myths, and understand the potential investment’s opportunity cost.

  1. Investing in the stock market is gambling
  2. Low priced stocks, especially those at 52-week lows are worth buying
  3. Investment analysts and advisors know how investments will perform

Investing In The Stock Market Is Gambling

Simplistically, investing is just another spending form. You buy a book, a car, a house, and you buy stocks, bonds, or other investment instruments. The key is to develop a solid process to follow instinctively before spending: a spending decision process.

Your attitude will decide how you behave, and so, you could choose to spend on stocks and bonds – invest – with a gambling motive. That’s why I advise folks never to invest unless they fulfill specific prerequisites, such as being debt free with an established process to replace major assets for cash, and having clear, concise, written investment goals.

Then again, even with clear goals, individuals need to know that consistent, solid earnings is the key sustainer of a business’ value, and ultimately, its stock market price.

Low Priced Stocks, Especially Those At 52-week Lows, Are Worth Buying

Here is a trap to avoid. A stock is trading at its 52-week low, falling over 50%, and you think it presents a buying opportunity. Maybe; on the other hand, maybe not! Likely, that business’ products and services no longer have the capability to produce previously perceived earnings. Alternatively, investment analysts and others may have promoted this business because of some fad or other irrelevant reason. Yahoo! and Nortel are examples of companies whose stock prices traded at unsustainable levels; after the expected collapse, their stock prices did not recover. Many other examples exist, particularly on the Japanese stock exchange.

As I mentioned above, as with all spending, we need to follow a spending decision process before investing. This will allow us to use a fall in stock price as a trigger to identify business’ fundamentals and potential investment opportunities.

Investment Analysts And Advisors Know How Investments Will Perform

When you listen to these folks, you might forget that they, like you and I, have no clue about the future. Some are in conflicts of interest, blinded, and pushing particular products. Others might be sincere but are relying on the past. And we know, the past might not be a good predictor of the future.

Can these folks help? Certainly, but each client must try to understand whom his or her advisor represents, and accept that advisors do not know the future. Accordingly, folks receiving investment advice must be fully aware that they, not their advisors, need to decide when and how to act from advice they get.

Before you start investing, dispel the above three myths, learn key investment basics, and learn and make sure you fulfill specific investing preconditions.

This final point is obvious but often folks overlook it. Investing in the stock market has an opportunity cost; it reduces, by amounts invested, funds available for other purposes. Ten thousand dollars invested in the market could buy a car, pay a portion of a college semester’s fees, or be donated to charity. Therefore, as part of your spending decision process, ask these three questions before deciding to invest:

  1. What other alternatives exists to use funds you are about to invest?
  2. Given your present and expected situation, is this the best use of funds today?
  3. Will you need to replenish these funds to carry out other specific goals in the next three to five years?

© Copyright 2013, Michel A. Bell