How to Avoid Investing Like a Rookie

When it comes to investing money, everyone seems to have advice, however, the vast majority of investors today have very little experience picking good investments. The advice given often is just recycled stock tips overheard at the office, or at best, from a pundit with a stock market recap show. Far too often, the end result is a loss, and even worse, a misunderstanding of why it happened.

Investing successfully is a complex skill that can take years to master, however, here are 5 timeless principles that new investors can use when considering any potential investment:

  1. Never invest what you cannot risk to lose. For the new or casual investor, one of the worst things you can do is use money you need in the near future, or even worse, using money you do not have. The best mindset going in is to decide what amount you are willing to lose completely and then only invest that amount. The honest truth is that once money is invested, you no longer control whether your investment has value. No matter how good an investment looks, there is absolutely no guarantee its value will grow, and there is always a chance that sudden, catastrophic events can flatten the company quickly.
  • Remove emotion. Don’t follow the crowd. There is a well-known fear/greed meter that shows what the motivation for most investors is at a given time, however, the most successful investors remove their emotion from investing. They follow their investment principles and profit by emotional decision making going into most trades. The more you can treat your profits and losses objectively, the more successful and happy you will be with your investments.
  • Invest in what you know. A great place to start with investing is to look at companies within an industry or sector that you are interested in. If you really enjoy shopping online for shoes, research public online shoe retailers. Look closely at the companies you like and see how they are really doing financially. You may be surprised with both good and bad data, but most likely, you will find one or two possible investment ideas.
  • Educate yourself. There is no substitute for doing your own research and learning from the experts. There are many great resources online, like Investopedia, The Motley Fool, and Fidelity Investments that have extensive free learning resources to help the beginner and expert alike. It is often said that experience is the best teacher. Well, experience is a good teacher, however, make sure it’s someone else’s experience you learn from. Especially when it comes to losing money.
  • Know your entry and exit points and stick with them. Once you have found a good investment choice, be sure to study its price movements, including any recent changes up and down due to investor sentiment, market news, or cyclical events like dividend announcements. Before you place the trade, decide at price you want to buy and at what prices you will sell. When you buy the stock, you must have predetermined what price you will sell if it goes down or up, and then, stick with those prices. If you do not, you will quickly be riding the emotional investing roller coaster with most other investors. After selling at your target price, re-evaluate whether it is still a good potential investment. If so, repeat the process all over again.

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