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Is there a magic formula for achieving
investment success? Not really,
although you would never know it by
reading all the advertisements touting
"surefire winners." The truth is that
there are few valid guarantees in the
investment world.
However, once you learn to
ignore all the exaggerated claims you
might encounter, you can actually do
quite a lot to become a more successful
investor. Here are five things all good
investors should know:
Patience is a big asset.
Stock prices will always go up and down.
The best investors overlook these
short-term price swings and do not head
to the investment sidelines when times
are tough. Of course, this is easier
said than done, especially when the
political and economic news of the day
is bad and the financial markets seem
rattled. Yet, history is full of wars,
crises and scandals and not one of them
has permanently harmed the outlook for
investments. In fact, after the initial
shock of the event has worn off,
financial markets have often recovered
lost ground in a matter of months and
then gone on to new heights. Of course,
past performance is not a guarantee of
any future results.
All investments carry
risk. Everyone knows that stocks can
lose value. But too many people do not
realize that all investments carry some
type of risk. For example, bonds and
Certificates of Deposit (CDs) may offer
substantial protection of principal, so
they might be considered safe. And yet,
these same vehicles may provide returns
that fail to keep up with inflation,
which means they carry purchasing power
risk. It is not the same risk as that
incurred by stocks, but it is a risk
nonetheless, and it is something to be
aware of if you are counting on your
investments to provide you with some of
your cash flow.
Expenses can reduce
returns. Obviously, you would like
your investments to provide you with
good returns. But be sure you do not
focus on returns to the exclusion of all
other factors, such as investment
expenses. The costs of investing can
significantly erode your investment
returns. For instance, if you are
constantly buying and selling stocks in
hopes of turning quick profits, you will
likely incur taxes and other costs that
can turn potentially big gains into
something else. You are likely to do
much better by purchasing quality
investments and holding them for the
long term, or until your needs change.
Knowledge is power.
Some people are not really sure what
they are investing in, and that can lead
to a variety of problems. For example,
they might invest in almost exactly the
same vehicles inside and outside their
401(k) plan, which could lead to an
over-concentration of assets in a
particular area. That could leave them
vulnerable to a downturn affecting that
one asset class. The more you know about
your investments, the less likely you
are to face unpleasant surprises down
the road.
Professional expertise is
valuable. Work with an investment
professional who knows your needs and
who will work with you one-on-one to
create a personalized strategy. |
