1. Understand The Market
Whatever investment market you choose, it’s important to understand the underlying asset that’s being traded. Whether it’s real estate, stocks, bonds or collectibles. Wise investing urges us to learn more about our investments.
It’s not necessary to be able to write a PhD paper on the subject but it’s helpful to understand the factors that affect the value of the asset and the parties involved.
2. Don’t Try To Beat The Market
It’s important to avoid trying to beat the market as an investor. Day-traders often fall into this trap because they believe they need to outperform their competitors.
Even worse, they believe they have key knowledge that far more intelligent computer algorithms don’t.
In fact, wise investing means it’s better to aim to profit a little as the market goes up instead of trying to predict and capitalize on that sudden surge. Likewise, it’s better to keep buying the underlying investment at a lower price when the market goes down as opposed to cashing all out because you’re trying to predict the next market crash.
Instead, by investing in a sound asset and adopting a long-term strategy, you are more likely to profit. This also decreases the chance of major loss.
3. Ignore Market Hype
Most of what you hear in the news or rumors which are spread, are useless bits of information when it comes to investing. You are unlikely to derive value by implementing them.
Wise investing often means that one needs to ignore market news and focus on the soundness of the underlying asset.
If a company such as Google has a major data breach and gets sued, it’s news. However, it doesn’t at all reflect on the strength of the company. You likely don’t have enough invested in the market to make a sizeable profit from that 5-10% rapid fluctuation.
If the housing market crashes due to high-risk mortgages, it doesn’t mean that real estate is a bad investment. In fact, during the 2008 housing market crash few diversified landlords saw drops in rental income.
4. Wise investing By Diversifying
You aren’t diversified if you have stocks in the US in both the tech and health sector. You are, however, quite diversified if you have broad index funds in:
- US markets
- Emerging markets
- Developed markets
- Bonds
Wise investing in real estate means you might have properties in various states or both commercial as well as residential units. You might have some units which you are about to sell for a profit while others are only rental income properties.
5. It’s Okay To Lose Value
Markets go up and they go down. There are far too many factors at play to be able to predict these cycles. Wise investing doesn’t mean you are immune to losses.
However, as long as your investments are going up and down with the tide of the overall market then it’s okay to lose some value in your portfolio. If the underlying asset is a sound investment then it should recover in time.
If you are diversified, you understand the investment, and you don’t act emotionally then your portfolio will rise again and likely earn you a profit in the long-run.
6. Curb Your Risk
Some investments are best avoided. If you have to make strong predictions (guessing) in order to net a profit, it might not be the right investment. This is called speculating and sometimes guessing. It’s best left to those who have ways of manipulating their markets.
Wise investing habits focus on broader markets even though the returns won’t be as sexy. But that also means that the losses won’t be as catastrophic.
7. Avoid Predictions
It’s impossible to tell which sector will dip or do well in the immediate future. Will health continue on its current strong rise? It might, but it could also stagnate.
Wise investing focuses on investing in sound markets with strong underlying companies.
Predicting how a market will do is impossible. It’s only hindsight that offers perfect clarity:
- Why would small-caps have done so well in 2003?
- Why did REITs do so well in 2014?
- Why did emerging markets do so well in 2012?
- Why did bonds perform so poorly in 2005-6?
There may be theories years after the fact but you had no way of knowing it because the signs weren’t clear.
8. Learn How To Pocket Profits
If you are investing in CD’s then you know that after 1 year you’ll have an X% return. From this you’ll owe some taxes. And if you withdraw your investment too early then you’ll be penalized.
Understanding the way you can pocket profits from your investment is important, otherwise you’re just playing a game.
When you lend money to a company/government then you are investing in a bond. It’s called a “fixed income” because you’ll know exactly what the terms of the debt is and how much you stand to profit.
When you invest in a stock then you are becoming a co-owner of the company. That company may then create profits for you by paying out dividends or helping the price of the stock to go up.
Finally, once you sell the stock or pocket the dividends (or reinvest them) then you have made a profit.
9. Pick an Investment Strategy
Are you going to buy and hold real estate?
Are you going to buy real estate and rent it out?
Are you going to buy stocks short-term and hope for them to go up?
Or invest in a diversified broad market and capture the gains when the market goes up?
Unless you are a professional investor, it’s better to stick with what has worked in the past. Smaller returns aren’t sexy but because you have a lot of money to invest as a healthcare professional, it will go a long way.
10. Build the Right Portfolio
When you sit down and decide which index funds or ETF’s to hold in your portfolio, it’s important to understand where your profits come from.
Stocks offer more returns at a higher risk (volatility). When some investors become too conservative and have mostly bonds or cash in their portfolio, they stop profiting from their investments. Women are at higher risk than men here.
Small-company stocks will likely return higher profits. Adding some small-cap funds to your portfolio could increase your overall returns. However, it will also increase the volatility (ups and downs) of the portfolio.
On the other hand, bonds with better ratings will return less than junk bonds. It might be better to invest in the lower-yield bonds, however, because of the decreased risk.
Longer term bonds may have higher returns but they might fluctuate more and be affected by inflation.
11. Respect Profitability
When a company produces profits, it is more likely to be a good investment. This might sound obvious but there are quite a few companies out there that seem sexy but are returning very little profits.
This is why investing in government bonds held by strong countries with good ratings is a better investment than investing in riskier countries even if they offer better yields.
12. company momentum
If an industry or individual company has been trending in a particular direction, it’s likely that it will continue on that trajectory for the near future.
If the tech industry is on the rise, even the crash we saw in 2001 won’t stop it. If the investor was well-diversified at that time then they experienced nothing more than a temporary drop.
13. Curbing Your Emotions
Investing psychology is one of the biggest reasons why so many individual investors underperform the market.
Selling because of bad market news or buying because of market hype often don’t lead to profits.
If you get the strong urge to take action because of recent market events then first ask yourself, is this really a huge paradigm shift that changes the value of the underlying asset? If so, then selling might be a good idea.
However, if the market events have sparked a mass sell-frenzy and you still have faith in your underlying asset then you should do everything possible to keep it. That will lead to eventual profits.