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More than 55 percent of Americans have some type of investment in the stock market and for good reason: it’s a great way to build wealth. However, it’s not as simple as you might think.
There’s a huge difference between buying stocks just because you can and learning how to be a good investor. The best investors leverage strategies to help them buy, sell, and trade throughout the year.
If you’ve been trying to figure out where to start, it’s normal to feel a bit overwhelmed.
Use this guide to help you get started on the right track from the very beginning
Understand Your “Why”
Before you can start looking at better investing strategies, you need to make sure you know why you’re investing in the first place. Ask yourself what you want to achieve with your investments.
Are you looking to increase your yearly income or are you hoping to build better retirement savings? Do you want to invest to create a better future for your family or do you want to replace your regular job with income from your investments?
Once you understand why you’re starting to invest, you’ll be able to create a strategy to help you reach those goals.
It’s okay if your reasons for investing change over time. Just keep track of your goals and do what you can to reach them, no matter what your goals are.
Figure Out Your Risk Tolerance
When you’re first learning how to become an investor, you’ll hear the term “risk tolerance” almost daily. Risk tolerance refers to how much risk you’re willing to take with your money.
If you have a low-risk tolerance, you’ll want to invest in funds and companies that don’t change dramatically with every market shift. This means if the market is up, the value of your investments will increase only slightly. However, if the market drops, your investments will retain more of their value than other high-risk investments.
Keep in mind that the higher your risk tolerance is, the greater potential you have to earn more money. High-risk investments mean higher potential returns. However, those high returns come with a chance for catastrophic losses.
The best investor knows exactly what their risk tolerance is and isn’t afraid to reassess throughout the year.
Diversify Your Portfolio
It’s tempting to invest tons of money into a company or industry that you’re passionate about. Following your passions and supporting businesses and industries that you understand and love is a great place to start. However, it’s not something you should throw all of your money into.
You need to diversify your portfolio. Invest in companies that operate in different industries and provide different services. This way, you’ll hedge against downturns in one industry by having others that aren’t affected.
As a general rule, it’s best to also diversify your portfolio’s risk tolerance. Choose some higher-risk investments so you can increase your earning potential each year. Then, choose a few lower-risk investments so your money can withstand changes in the market.
Read Up on Trends
As you grow your portfolio, you’ll want to pay attention to industry trends and get to know how your investments will likely behave. This will help you become the best investor possible and allows you to know when to sell, when to buy, and when to hold onto your investments.
Learn more about how each one of your investments behaves and look at the way the market conditions influence their values. The top investors know how to examine trends and adjust their investment strategies on the fly to better improve their earnings.
Don’t Lead with Your Heart
When your money is on the line, it’s easy to get caught up in the emotional side of things. Unfortunately, this can lead even the best investors in the world to make mistakes.
Instead of responding to changing market conditions emotionally, take a deep breath. Assess how your investments are doing even with the downswings and upswings. Be as rational as possible—if you need to, pretend it’s not your money so you can look at the performance more calmly.
If it makes sense to sell, do it. If it makes sense to hold onto your investments until the industry recovers, do that instead.
Don’t Neglect Your Savings
Great investment strategies can increase your income significantly. However, that doesn’t mean you should throw all of your money into the market.
Remember, investing carries risk. You may be able to make money, but you can lose it, too. So, be cautious.
Set aside money every month and add it to an interest-bearing savings account. While the money won’t earn the same returns as your investments, it will still see some gains.
Even better, you’ll have money on-hand to cover expenses if your investments lose value or you get furloughed from your job.
Look at the Fees You’re Paying
The biggest key for how to be a good investor is to keep an eye on the fees you’re paying for your investments.
If you’re handling your own trades and working as your own advisor, you’ll still pay fees to the brokerage firm you’re using. If you work with a financial advisor, you’ll pay them a certain percentage for every trade you make.
Make sure you’re comfortable with those fees and don’t hesitate to shop around. You may be able to lower your fees by going with a different financial advisor or brokerage firm with a solid trade execution portfolio.
Now That You Know How to be a Good Investor, Get Started
Investing is a great way to earn money without forcing you to take on another job or spend time away from the people you love. If you’ve been wondering how to be a good investor, keep this guide handy and you’ll be ready to get started in no time.
As long as you diversify your portfolio and give it time to grow, you’ll be in good shape.
Looking for a few more helpful tips and tricks to streamline your investing strategy? Check out our latest posts.
