7 Investing Tips to Become a Successful Investor
The fact that you’re reading this post means that you’re probably aware that some people grow their wealth by investing their money. Maybe you come from a family who invests and so you have an understanding of how it all works. Or maybe you don’t, and yet you’re still curious and wonder what all the hype is about investing anyway.
No matter what you know (or don’t know) right now about investing, it’s never too late to get educated and start. Read on to learn how investing can benefit you, plus get seven invaluable investing tips that will provide you with the foundational understanding you need to put your money to work for you.
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I Get a Paycheck. Why Should I Invest Too?
When you’re not exposed to investing from a young age, sometimes it’s hard to wrap your mind around it. After all, it’s easy to understand the concept of going to work and earning a paycheck, right? If you need more money, you work harder and longer to bring in a higher income.
This is sound reasoning, and it does work - but only to an extent. Because obviously there are only so many hours in a day. So your ability to earn more money is limited by how much time you are able to work. Investing, on the other hand, can earn you additional money even while you’re sleeping. Or watching TV. Or surfing social media on your phone. Investing has the potential to provide you with strong returns over time without having to punch a time clock or even lift a finger.
Despite how hands-off investing can be (and how enticing all this sounds), you will need to make an initial investment of some time and effort. Finding your right investment objectives is key (and it can get confusing with so many influencers telling you to invest in trends such as bitcoin, NFTs or meme stocks! or simply how to choose the right mix of stocks, bonds, mutual funds, real estate, commodities, options, annuities, and so on, and so on for you). The goal of this article is to demystify some of these investing complexities for you.
How Do I Invest? 7 Essential Investing Tips
If you’re completely new to investing - or even if you already consider yourself a successful investor - it can be advantageous to have some basic philosophies and tips in mind to help guide you as you invest. Check out the following seven investing tips to learn more and get started.
Investing Tip #1: Get Your Finances In Order First
Nowadays it’s easy to get started investing even if you only have a small amount of extra cash. (With investing apps like Stash and Robinhood you can invest as little as $5 in fractional shares, and there are either no or very low commission fees.) Even so, it’s imperative that before you start investing money, you make sure that your finances are in order first. This means establishing an emergency fund, setting up contributions towards retirement accounts like 401(K)s and IRAs, and paying off high-interest credit cards before you begin investing. (Learn more about managing your personal finances here.)
Investing Tip #2: Choose Your Investment Philosophy
It’s easy to randomly invest in hot stocks you hear about at the local deli or around the watercooler at work, but being a successful investor requires that you think about the big picture and create goals. What financial objectives (e.g., building up retirement savings, buying a house, funding your kids’ college costs) are you trying to accomplish, and how can you achieve them? Being clear about your investing goals will also help you to stay motivated and on track.
Investing Tip #3: Use Your Goals to Guide Your Investments
Once you’ve established your goals, other aspects of your investing strategy will crystallize, including your time horizon and risk tolerance. For example, if you plan to use some of your investments to fund your retirement later in life, investing long term (in other words, not daytrading, which can be riskier, but instead holding investments for a longer period of time) will likely be the best choice for you. If, on the other hand, you want to use some of your investing proceeds to buy a house in just a few years, you will invest with a shorter timeframe in mind. Also, most investing portfolios contain a mix of both stocks and bonds. Depending on your objectives, you might want to allocate more of your portfolio to stocks (which tend to provide higher returns overall than bonds) than bonds (which tend to provide lower returns but with less risk) or vice versa.
Investing Tip #4: Diversify to Lower Your Risk
Speaking of asset allocation, this is one approach you can take to control the risk in your portfolio. There are different asset classes (e.g., stocks, bonds, real estate, commodities, futures) that you can choose to invest in. Some are riskier than others. When you invest in multiple asset classes (that is, diversify) you lower your overall risk (because if one asset class drops in value, those losses will be offset by the other assets you own). It’s also possible - and preferred - to diversify within each asset class too. For example, if you own stocks, you can further diversify your portfolio by buying stocks in companies from different industries.
Investing Tip #5: Check Out Investing Apps
There are many ways you can learn more about investing, from reading investing blogs and investing books for beginners to talking to people you know who already invest. Another way is to check out investing apps. In recent years, investing apps for beginners have surged in popularity and for good reason. They have made investing more accessible to the general public, less intimidating, and in many cases more fun. So if you’re scared by the idea of creating an account with a large brokerage firm like Charles Schwab and investing a lot of money right off the bat, consider downloading an investing app onto your phone and investing just a little money to start. You’ll be surprised at how easy it will be once you take that first step! (Click here for more in-depth information about how to start a stock portfolio.)
Investing Tip #6: Don’t Stress About Market Volatility
Many times novice investors buy a stock and then proceed to check their favorite investing news website repetitively, feeling elated if their stock has moved up with the market at all and devastated if it has dropped. It’s important to realize, however, that the daily highs and lows of the market don’t matter in the long run. The day-to-day volatility of financial markets is overshadowed by their overall upward trend over years. So unless you’re within just a few years of retirement, your investing portfolio will likely be able to handle some temporary dips and blips.
Investing Tip #7: Understand the Power of Compound Interest
This is one investing tip you won’t want to forget, trust us. Although a lot of people only think of interest when it comes to debt, you can make interest work for you when it comes to investing too. In fact, taking advantage of the power of compound interest is a sure way to accumulate significant wealth. The key is to start investing as early as you can and to make sure to automatically reinvest the dividends and interest your investments receive. Over time, the compound interest will accelate the growth of your investments. Put your money to work for you!
How Do I Know These Investing Tips Will Work?
While it can be easy to get lost in a million little details when it comes to investing (like, should you use a top-down or bottom-up approach to investing, huh?), it’s a good idea to take a step back and focus on the general truths that have guided even the best investors of all time (like Warren Buffett, Peter Lynch, and Carl Icahn). The seven investing tips above lay a solid foundation for successful investing.
So as you move forward on your investing journey, keep in mind the importance of establishing investing objectives (so you’re not at the whim of every hot stock tip you hear), diversifying your portfolio, and taking advantage of the miraculous power of compound interest by turning on the reinvest option. And don’t stress about the market being up or down on any certain day - invest for the long term (potentially using an investing app if this makes things easier for you) and in the end you’ll be grateful you did!
