Investment Success Needs a well Conceived Plan
Simple Investment Advice
Warren Buffet is regarded by many as one of the most successful investors of all time. His advice to all future investors is simple. He says that you need not have extraordinary intelligence, business experience or possess inside information about movement of shares to strike it rich at the stock market.
He says, a well researched and thought out plan is the building blocks to success. A carefully developed plan and having the fortitude to stick to it in times of uncertainly is the mantra for success in the stock market.
3 Fatal Errors that You Must Avoid
All investors foray into the stock market with 3 intrinsic emotions which are greed, hope, and fear. Dipping prices make you fearful and you sell frantically to reduce losses ignoring all rational reasoning to review why you purchased the stock in the first place and don’t check to see if those fundamentals have changed. If the basic fundamentals for purchasing the stock in the first place haven’t changed, then there is likelihood that the stock price will recover its losses. If conditions have not changed, you should stick to your investment. But, fear makes you sell immediately to keep your losses to a minimum. Buffet says, you then miss out on profits in the event prices recover.
You buy stock of a company in the hope that prices would increase as you are convinced about future performance of the company. People blindly invested in internet based companies during the late nineties in the hope that they would do well in future. But, the dotcom bubble burst, causing losses of hundreds of millions of dollars to those investors. You need to do some homework to check the fundamental of the company and not invest solely upon hope, conjecture and rumour.
It Pays to Drill
Don’t just rely on the past performance of any company that looks good, it pays to drill down into the company’s history to ascertain whether or not the company is based on sound financial fundamentals that will carry it successfully through into the future.
Greed is another factor that easily and quickly distorts investors rational thinking that that has led to the doom of many in the past. If your selected stocks have done well and you have booked profit, there is no need to hold on to them hoping the prices will go up even further still solely based on greed.
If you hold on too long thinking that the price is going to go even higher it’s possible that kind of attitude could blow up in your face and you could simply end up in a losing position.
A winning investment plan mandates that you must continually manage all three of those emotions if you want to be successful while trading in the stock market.
Basics of an Investment Plan
Knowing the objectives is the first step with any investment plan and then sticking to them under all conditions. Out of the three basic objectives of an investment plan if your goal is to derive an income stream then you should be looking for blue chip low risk shares and not necessarily speculative shares that offer quick capital growth.
In contrast to the income strategy you may be looking for shares that offer capital growth. This strategy is for the longer term investor. Many of those investors tend to be in the younger set category, because they can afford to sit and wait over the longer term. If this category appeals to you, reflect on your age, what your risk tolerance is and the reality of what your investment chances are.
Last but certainly not least is safety. If you don’t want to risk the loss of your seed capital you must keep safety in the fore of your mind at all times. To do this, in the beginning it pays to avoid risks with those not so secure (oh so tempting) investments.
Carefully consider your major objective out of these parameters and devise a plan that is based upon this objective.
Tolerance Towards Risk
Different investors have different risk tolerance. If you are not comfortable with the risk level of your portfolio, you should focus more on safety and deriving an income stream from your assets rather than growth of your investment. Nonetheless you can focus upon growth if you have the capacity to absorb losses if you wish to pursue the potential of faster and higher capital gains..
Allocation of Assets
You need to have a balanced portfolio to cater to the objectives of your investment plan. Just see to it that your risk tolerance level is not crossed while allocating assets to various modes of investment. Your financial advisor may well suggest diversifying your portfolio by distributing your assets to stocks, bonds, and mutual funds depending upon your requirements and goals.
If growth is your top most priority, investing in ETF’s (Exchange Traded Funds) or mutual funds might be a good idea for you. If protection of your wealth with income generation is your aim, investing in government bonds is the best option for you. If you want to choose the stock on your own, you must accept rules to enter and exit to prevent falling prey to fear, greed, and hope.
Whichever policy you choose, the secret to your success as an investor lies in the well founded investment plan you have made and your ability to stick to it.