Lessons about investing

Lessons about investing

Don't be afraid to ask

Despite what many people think or say, none of us know it all. Whatever your level or experiance of investing we all have scope to learn more and improve our investment skills. By learning from some of the lessons below you will hopefully be able to increase your investment returns.

Lesson 1: Don't believe everything you hear

There is a famous quote regarding stoick market investing that goes "The only people that buy at the bottom and sell at the top are liars". Many investors or people offering investment services are quick to highlight how well they have perfomred in the past and will often make amazing claims about their past performances. Just rememeber that they are probably telling you for a reason i.e. they want to sell you something. This is not to say don't believe anyone, but rather take an objective view and formulate your own decisions.

Lesson 2: Define your investment goals

Before devising your investment strategy it is crucial to understand your goals. Are you investing for your retirement? Saving for a new car? Planning for your childs future? Sheltering money for a rainy day? All of these options will require different strategies and wil require investments with different risk profiles so be sure to fully understand your needs. Do so by writing them down.

Lesson 3: Research until you can't research any more

Many investors have made significant losses by simply acting on impulse or diving into an investment at the first sign of potential. Your investment decisions are potentially some of the most improtant you'll ever make so make dure you are diciplined and don't make any rash judgements. No matter how attractive a proposition looks be sure to fully research it. Look at all aspects of the investment not forgetting your exit strategy (when and how you can sell the investment), especially if things turn out differently to what you expected.

Lesson 4: Manage the risks you take

Absolutely key to any invesment strategy is risk management. There are a number of ways you can do this. A good start is to list all of the different types of risk you face. Such risks could include a fall in the stock market, a drop in interest rates or counterparty default. For each risk identified try to identify either a way of eliminating or controlling the effect of the risk. For three examples given here these couls be; setting a stop loss sell order with your broker, depositing savings into a fixed rate account and spreading your investments accross a variety of companies/providors incase one goes bankrupt.

Lesson 5: Get help from the professionals

There are always aspects of any investment that you may not fully understand. Where this is the case and you cannot find an explanation during your research then do not be afraid to get advice. There are plenty of options available ranging from your local bank, stockbroker, friends and family, colleagues, your accountant or independant financial advisors. Sometimes it will be a lot quicker and easier to simply pay for the advice of a professional than spend days or weeks doing the research by yourself and learning a whole new skill set.

A great example of this outsourcing of investment skill is by investing in a fund. By doing so you are simply paying a professional (the fund manager) to use his or her skills to invest your money. Obviously you will pay for this skill in the form of admin fees however to many investors such fees are a small price to pay for what they get in return.

Lesson 6: Realise your gains

Another great saying is that you haven't made or lost anything until you sell. Often investors become obsessed by checking the value of their portfolio. While this is essential to do what is equally essential is to regularly calculate your realised profit or loss. Many investors failed to do this during the infamous dot com crash of 2000. So called 'paper gains' were not realised and when prices began to tumble investors froze, again not taking their gains. As a result many investors still own stock in dot com companies that are now worth only a fraction of their former values. Calulating realised profit or gains allows you to guage your performance against you investment goals and will tell you if your strategy need adjusting. Do not be afraid to admit to failure.