Everyone has their own strategy when it comes to investing. Sadly for most, their strategy is flawed and they end up losing more money than they make. Sure they will tell you about that one stock they made a fortune on, but they fail to mention all of the other investments where they lost money.
At the end of the end, when it comes to investing, there is no way to consistently beat the market. Sure some people have done it over the short-term, but no one has figured out the riddle of how to do it consistently. My guess is that no one will either. For this reason, your best chance for investing successfully in the stock market is to follow four steps.
3 Investing Steps For Success
Invest For The Long-Term
Too many investors buy into a mutual fund or stock, see it drop in value and immediately sell and find another mutual fund or stock to invest in. This is not the path to long-term success in the stock market. To be successful, you have to invest for the long-term. This means taking your time to research the investments that make the most sense for your situation and then buy them.
After you buy them, you continue to buy more shares as time goes on. You don’t sell when the investment drops in value and you don’t sell when the market drops. You hold for the long-term.
But don’t confuse this with forgetting about your investment. You still have to check up on it and make sure it has a place in your overall financial plan. Don’t make the mistake of confusing buy and hold with buy and forget. They are two separate things.
Diversify Your Risks
The next step to investing success is to make sure you are spreading your risk or diversifying your investments. When you invest in different sectors of the market, you lessen your risk while keeping a return that you need to earn. You should be investing a piece of your money in US stocks, international stocks and US bonds as a start.
From there you can invest in both small and large companies both in the US and overseas. With this said, don’t go overboard. I’ve seen too many people think that diversification means buying 100 mutual funds. This is overkill and these investments have a lot of overlap. You really only need a handful of investments to be diversified and you can get away with as little as 3 in fact.
Finally, don’t mistake “lowering your risk” with eliminating your risk. Even with diversification, you will still have some risk and will lose money from time to time. You can never eliminate risk 100% from your investments, but you can lessen it.
Compound interest is your friend, though a lot of people don’t seem to have the patience to let it works its magic. To fully appreciate compound interest, you have to know that it takes time to really get going. Think of it like a car. You don’t go from 0-100 instantly in any car. It takes time to build up to that speed.
The same holds true for compounding. The more time you give it, the more it will work in your favor. After 5 years, a $1,000 investment earning 8% only grows to $7,300. But after 40 years it grows to more than $108,000.
They say it takes a lot less time to grow your wealth from $1 million to $2 million than it does to reach that first million. This is because of compound interest. As your balance grows, the compounding gets faster and faster.
At the end of the day, you can be successful when investing in the stock market. You just have to invest for the long-term, diversify your investments and give compound interest time to work its magic. If you can do these things, you will experience success when investing in the stock market.