I thought it might be a good time to run over my stock market & investing tips again plus allow others to share their tips as well. My list of stock market investment tips of course doesn’t cover everything & I am not suggesting it’s all anyone needs to read before they invest in shares. But I hope it’s of use to those who are looking to invest in shares or are managing their own investment portfolio.
Do not put everything you own or even most of what you own into any one investment.
This excludes the family home which technically is not an investment. You will of course kick yourself when company XYZ goes up 300% overnight and you were going to invest everything you own in that company, however this pain is far less than losing everything because you put all your eggs into one basket and that basket falls off a rather high cliff. I know this sounds like a pretty basic rule, but it is amazing how many people end up putting most of their savings into a single investment scheme that ends up falling apart.
Write down all the bad things about any investment before you invest.
If you cannot think of any bad aspects about an investment you are contemplating of investing in then get some advice, because all investments have risks and potential problems. After you complete the list ask yourself if the expected return you may get is worth the risk, or do you feel more comfortable with having you money in the bank until something else comes along?
Make sure you understand the Product Disclosure Statement (PDS) or documentation related to the investment.
Product Disclosure Statement’s are not the easiest documents in the world to understand. I often wonder if the people writing them are paid by the word as they seem to be able to produce dozens of pages of documentation without actually making things clear to the average investor. Take you time reading any investment related material (try and stay awake) and Google any terms you are unsure of. If you still have trouble getting a good understanding of what is in the PDS then either skip the investment or seek good professional advice.
Do you own research!
The internet is a great place to do research. In particular you can check the ASIC website and search for company information or financial scams. You can also use a site like Investopedia to read up on investment and financial terms. In addition most online brokers these days also provide varying levels of company research and analysts reports.
Also try to read widely and obtain a few different sources of information. Many investment related websites do not necessarily offer independent analysis even though they may claim they do, so look around. If a particular website or advisor is pushing an investment product or asset class strongly then ask yourself why are they doing this? Do they stand to gain from commissions? Are they selling a related product or trying to steer you into a paid newsletter subscription? Is the product or investment they are suggesting really suitable for your risk profile and investment objectives?
Have a disaster plan!
In a perfect world we would make a series of investments and then sit back and watch them grow into a lovely sum that would fund our retirement or allow us to buy that boat we always wanted. However we need to be prepared for trouble and think about what we will do if there is a stock market crash or some of our investments fail. For example ask yourself these questions:
- At what point would I try and cash in my investments if their value began to fall?
- At what point would I sell my stocks in a particular company during a stock market rout?
- What sort of losses can I manage?
- What will happen I get a margin call? Do I have cash ready for that situation?
- Can I handle a few years of negative returns?
The key point about having a disaster plan (and you can just do it in your head) is that it makes you think of the risks involved when investing. I suggest you regularly review your disaster plan as you might find it a lot easier to do this when you have time, rather than trying to sort things out in a panic when that margin call arrives.
Look after your health.
Being healthy is far more important than trying to be the next Warren Buffett. If you find yourself unable to sleep at night because you are worried about stock prices then I would suggest you look at putting your money in the bank. Managing investments is not for everyone, and for many people it is probably better for them to seek assistance from a good financial or investment professional rather than try to do everything for themselves.
Get expert or professional advice.
Even if you are an expert investor you will at times be out of your depth and may need some advice to help you make a decision. This advice can be obtained sometimes by reading a variety of analysts reports, by contacting your broker or by speaking to your financial adviser. As a starting point have a look at the Financial Planning Association of Australia website: http://www.fpa.asn.au
Expect to have losses and bad days.
It would be just lovely if none of our stocks or investments ever declined in value. However no investment is 100% safe and as the saying goes, the higher the expected return – the higher the risk. So mentally prepare yourself for having the odd failure. If the thought of having an investment failing makes you nervous then that is probably a good thing and you will avoid putting too much money into any one investment type. It is better to miss some gain and preserve your money, than to lose everything.
Try and keep a good sense of humour.
Try and keep your sense of humour during both you moments of investment triumph and at the times when your falling asset values and stock prices are causing you grief. Remember if you have followed my tips above you should not have put all you money in any one investment, and so hopefully not all your investments will be down at the same time. As that song goes in the Life of Brian…try to “always look on the bright side of life”. If you find yourself yelling at the dog and pulling the arms off your teddy bear, then perhaps active investing is not for you.
As I said at the beginning, this list of tips doesn’t cover everything so if readers have other tips please leave a comment and let me know what they are.
This article was written by Greg Atkinson who is the editor of Shareswatch Australia and the Managing Director of Ohori Capital. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp