Five Investing Tips
Date Added: May, 2001
By Chris Stallman
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One
of the five most commonly asked questions I get is "How do
I invest correctly?" People invest their money because they
want it to see an increase in it. However, in the frenzy of getting
started they sometimes overlook some of the key fundamentals to
investing successfully.
Think Long-term
So many
people begin investing with the mindset that they will become instant
millionaires. The reality is that the odds of this happening are
pretty slim. I don't mean that the odds of them becoming a millionaire
are bad; I just mean that the odds of them becoming one so quickly
are.
Taking a long-term perspective is key to financial
success because studies have shown that amateur investors who make
very few trades each year actually outperform those who trade often.
Although there are quite a few active investors whose portfolios
perform well, a large amount get so caught up with investing that
they make poor investments because they rush themselves.
Investing
for the long-term is also important because it can save you on taxes
because you qualify for the lower capital gains tax. Over the course
of your life, paying less in taxes will save you an incredible amount
of money.
Don't Chase the Trends
I occasionally
turn the TV onto financial shows such as CNBC. Whenever I do, I
usually hear about certain stocks or industries "soaring to
new highs". This hype builds up to a hysteria among investors
who want to buy these types of stocks just because they're "hot".
Well, I have a secret for you: these stocks are "hot"
because they have gone up a lot and they also face the serious risk
of a big fall.
Trends are very hard to predict ahead of time and most
investors don't realize the trend until it has already happened.
In hopes of the trend continuing, they still buy the stock. Just
because a stock or industry was
"hot", it doesn't
mean that it will continue to be. After all, no trend lasts forever.
Don't believe me? Where's New Kids on the Block now?
Reinvest, Reinvest, Reinvest
I can't
stress reinvesting your dividends and capital gains enough. Many
people receive a quarterly dividend check and simply spend it. Rather
than doing this, I have found it very beneficial to take that money
and put it back into my investments. Doing so speeds up the process
of compounding.
Keep Focused on Your Goals
Investing opens
up the opportunity for regular people to earn a nice return on their
investments. Unfortunately, many people lose focus on what they
are saving for after they begin to invest. For example, I know someone
who received a cash gift that he invested with the intention to
save for college. He quickly doubled his money and decided to take
the money out of the account and spend it. He had totally lost sight
of his original goal of saving for college, which I'm sure he'll
regret when his first tuition bill comes. Keeping focused ensures
that you will be prepared for your financial goals.
If It Sounds Too Good to Be
True, It Probably Is
There are a lot of investment firms out there that
promise you high returns. You may open up a newspaper or magazine
and see an ad for someone who promises that you will earn 500%
returns per year for using his/her service. Although the idea of
it sounds promising, be wary of what you get yourself into. There
are usually catches to these kinds of things. After all, receiving
a letter in the mail saying "You have just one a million dollars!"
doesn't mean you have actually won it. This is something that
my parents have taught me and it has paid off.
With these guidelines in mind, you can be one step
ahead of other investors who ignore these basic principles.
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