What makes a successful investor? The advisors at our firm decided to sit down and write out five things that investors should or should not do to be successful. After comparing our lists, we created the five do’s and five don’ts of investing.
Market timing is the act of moving in and out of the market based on using predictive methods such as technical indicators, economic data, or just how you feel that day. The problem is that no one can successfully time the market over the long run. At Blue Bell PWM we believe it’s not about timing the markets but time IN the markets, which you can read more about here.
You should be investing with the long term in mind. Focusing on daily market movements will matter little 10-20 years from now. Investors who get caught up in the short term often make poor decisions that lead to underperformance.
Diversification is a technique that reduces risk by allocating investment among various sectors, industries, and asset classes. Diversification is one of the most important components of reaching long-term financial goals while helping minimize risk.
Insurance should be used to reduce risk outside of the stock market not in it. Buying certain insurance vehicles like variable life insurance and annuities are normally not in the investors best interest. These products come with high fees and are difficult to understand even for the person selling them. Insurance can be a nice tool, but it should not be mixed with your investments.
Buying on margin involves borrowing money from a brokerage firm to purchase stock. While this gives potential for much higher profits it also comes with substantially more risk. Investing on margin can amplify your losses and result in a margin call which will force you to liquidate other positions to pay back what you borrowed.
Education is one of the best investments that you make especially when it come to your financial situation. Learning about saving and investing for retirement is easier today than ever before thanks to the internet.
The idea of saving and investing a fixed amount regardless of what the market is doing is known as dollar cost averaging (DCA). DCA cuts down the volatility over the long-term by spacing out the investment and diving the amount of money invested equally. This allows the investor to buy more when the market is low and less when it is higher.
Investments held for longer periods tend to exhibit lower volatility than those held for shorter periods. The longer you invest, the more likely you will be able to weather low market periods. Although short-term fluctuations seem random, the stock market tends to reflect the overall growth and productivity of the economy in the long run.
Understanding returns can make your portfolio evaluation easier. How your investment returns compare to the overall market can be a good indication if your strategy is working. You should also understand the difference between capital appreciation and dividend returns when picking investments as many investors tend to overvalue the dividend return.
There is no avoiding fees in the investment world but that does not mean you should ignore them. With some basic research you can figure out how much you are paying for investment services and how they compare to similar ones. The fees may seem small but over the long-term they can diminish your returns.