Taking Steady Investment First Steps
Before you invest in anything, you first must make sure that you have a strong economic foundation. If you don't, your situation is like building a brick house on shifting sand. You need to ensure that your debts are under control, your assets exceed your liabilities, you spend less money than you earn, and you regularly save a portion of what you earn. If you need help with any of these areas, seek a financial advisor who can help you locate and remedy the weak spots in your investment program's foundation.
A second prerequisite to investing is a complete understanding of the types of investments that are appropriate for your current situation in life. For example, if you're retired or near retirement, you need more safety and stability in your investments than people in their 30s do.
Finally, you must take the time to educate yourself about financial and investment matters. The average person spends more than 80,000 hours during a typical working lifetime yet may spend an average of less than 15 minutes a month finding out how his money can work for him.
Have adequate insurance
Do you have proper coverage for potential problems, such as disability or the death of a breadwinner in your family? Many stock portfolios get liquidated pretty fast when the dependents of the deceased need money for daily living expenses. You may work a lifetime to build your stock portfolio. If you don't have appropriate insurance, it could be wiped out very quickly and needlessly. See an insurance professional to guarantee that you and your family are protected.
Update your career skills
No matter how secure your job or company is, you should periodically update your resume and job skills to maintain your employability. At least once every two years, bring your most current resume to an employment agency and ask, " How quickly can you get me a job?" If your question is met with hesitation or a grimace, update your skills and expertise immediately, while you're still employed.
Establish an emergency fund
An emergency fund is a critical component of your financial well-being. Investors make a huge mistake by not having one. They assume that their stock portfolio and/or mutual fund investment will do, but they're wrong. Your stocks and mutual funds are meant for long-term growth, not short-term cash needs. Set up an emergency fund by putting at least three to six months' worth of gross living expenses in a safe, interest-bearing bank account or money market mutual fund.
Set up a budget
Budgeting is a crucial part of your financial foundation. Budgeting is the act of regularly monitoring and controlling what you make (income) and what you spend (expenses). The bottom line is that if you can't (or won't) budget, then you probably won't succeed as an investor. Fortunately, budgeting is easy, and many resources are available to help you set up a budget that suits your needs and goals.
Understand basic economics
The average citizen is incredibly ill informed about economics. Yet knowledge of economics is extremely important to everyone's investment goals. In fact, plenty of financial advisors and stock experts have lost a lot of money for themselves and their clients because they were woefully uninformed about basic economics. Concepts such as supply and demand aren't distant, arcane abstractions; they affect your money and financial success every day.
If you do read up on economics, look for authors who are well versed in free market principles, which lie at the heart of sound investment decisions. Some of the better economists that the serious stock investor should read are Ludwig von Mises, Mark Skousen, and Kurt Richebacher. Some Web sites that offer excellent economic research are Puplava Securities, Inc., and American Institute for Economic Research.
Read about investing
One behavior that separates successful investors from unsuccessful ones is reading. Just as in almost every discipline, people who read more learn more and gain more benefit.
Become an avid reader of stock investing publications and books. Browse investment newspapers, such as The Wall Street Journal and Investor's Business Daily. Read books written by (and on) the great investors in history and the strategies they employed. Read commentaries from financial writers and advisors that present both bullish and bearish opinions on the market. Look for different points of view on the stock market to develop and challenge your ability to be a logical and independent financial thinker.
More often than not, the herd mentality is wrong. Think as a contrarian investor. Contrarians usually make a fortune on the simple premise of buying when others are selling and vice versa. Contrarians look for stocks that are generally ignored by the market at large. They look for stocks that are hidden values that the public hasn't yet discovered. If the contrarian hears a dozen high-profile stock experts say, "Buy Quagmire Inc.," he won't buy it, because the public has already bought up the stock and there's usually little growth left in it.
However, if you do your own research, you can find great stocks before the market does and then watch the stock price rise when experts and the public start to notice your stock. As the public bids up the price of your shares, look for great opportunities to sell and lock in a handsome profit.
Successful investors do their homework on a stock, stick to their principles, and use a disciplined approach to stock buying (and selling). At the very least, they invest by using disciplined techniques that will help ensure a profit or limit loss.
Discipline is your ally in stock investing. Frequently, investors lose money or destroy their wealth as they let their emotions rule. Fear and greed are emotions that have driven bad investment decisions throughout history. Develop a rational and disciplined approach, and your long-term investment success will be more assured.