People have varying opinions about investing. But amidst all the data you’ll encounter on financial publications and online resources, there are universal truths that apply to every investment and investor. Acknowledging these truths can help you become a much more effective investor. Without further ado, here’s five irreversible facts you should know before putting money in the markets:
It’s Not a Get Rich Quick Scheme
The stories of famous investors, such as Warren Buffet and Peter Lynch, has somewhat romanticized investing for many people who are starting out. While it is possible to become billionaires through investing, it most likely won’t happen overnight or in the next year or two for that matter. Thinking that investing can get you rich beyond your wildest dreams in a few short months will tempt you to buy and sell more frequently, or trade the markets rather than buy and hold. This approach can be reckless and lead to more capital risk over time. Acknowledge the fact that it will take time to grow your investment capital, enough for you to be able to day trade it or earn significant ROI through dividend yield and initial investment growth.
Following the Herd Doesn’t Always Mean Safety
In the wild, there is safety in numbers. When it comes to investing, however, following the herd could be more detrimental than it is beneficial. There will be times when heeding the advice of experts and following market sentiment can lead to profitable positions, but every decision you make should be backed up up-to-date facts. Anecdotal evidence offered by pundits and self-proclaimed financial prophets should be avoided. Do the work yourself and research specific economies and organizations meticulously. Use background noise as validation for your research and investment ideas.
Leverage is a Double Edge Sword
Leverage, which allows you to buy a greater amount of asset than what you can pay for, is embraced by many investors as if it was a surefire tool for success. Albeit helpful in growing your account size much faster, it can also hurt your investment portfolio if you wield it irresponsibly. If you use 100 percent of the leverage provided by your broker, the chances of getting margin called by your broker rise drastically. A few percentage points in the opposite direction could result in your position being closed prematurely. Financial markets can be volatile. While your position may be in the right direction, you need to anticipate price moving against you by some amount.
The strategy you choose to use when investing will make all the difference between ending the year profitable and ending the year miserable. A strategy gives you structure, guides you during turbulent and volatile times in the market, and filters signals for you automatically. What strategy should you use depends on different factors, namely your account size, financial objectives, timelines, and risk profile. Some common methods of picking stocks in the market include hedging, value and growth investing, and put spread strategy.
Trading is Different From Investing
These two terms are commonly interchanged in formal publications and casual conversations, but they denote different things. Investing is buying into an asset that you perceive has greater value than what is being reflected from the current price. Meanwhile, trading is an attempt to profit from short-term price action. The latter is far riskier, and positions taken by traders often have a shorter duration compared to actual investments. If you trade, you aren’t buying value; you merely believe that an asset will reach a certain price at some point in time.
These five truths will help set realistic expectations for novice investors entering the field. Be patient, research thoroughly and try to think for yourself, and choose to buy and hold investments instead of swapping them every few hours or so.
Author Bio: Jeremy is a tech and business writer from Simi Valley, CA. He’s worked for Adobe, Google, and himself. He lives for success stories, and hopes to be one someday.