Luck may be on your side if the biotech share you just purchased doubles in price because the company announces it has found a cure for cancer. However, luck has very little to do with being a successful investor. Successful investors do not rely on luck to earn solid returns on the shares or other assets they choose to include in their portfolios. If you study the behaviour of successful investors, you will see that they all possess some or all of the following habits.
Failing to define your short- and long-term investment goals will make it difficult, if not impossible, to choose the most appropriate investments. If you set a financial goal that you want to reach by a certain date, you can focus on achieving that goal. And while having a clearly defined goal is important, it also needs to be augmented by a system to measure your progress toward achieving that goal.
Developing a Plan
Once you define your goal, develop a detailed strategic plan for the best way to reach your goal. The plan or strategy will cover the types of investments to make, the length of time you have and the amount you need to help guide your investment choices. Stay realistic (not overly optimistic) when developing a plan.
Save More and Spend Less
You need a ready source of money to invest. Earning more, saving more, and cutting back on your spending and expenses can give you access to more available cash.
Have Sufficient Liquid Assets to Ride Out Down Markets
You never want to be in the position of having to sell a share at the wrong time because you have a pressing need for cash. Whether you are facing a medical emergency or planned outlay, always have an adequate amount of cash available so you are not forced to liquidate your holdings and take a loss.
Understand Risk & Reward
When you are contemplating any type of investment, maintain a clear understanding of both the amount of risk you are taking and the possible return on your money. Generally speaking, investments that involve high risk have a higher probability of greater rewards than low-risk investments.
Understand What You are Buying
Just as you would do research before buying a new car or other expensive item, research shares and other investments to know what you are buying. A big mistake many amateur investors make is relying on hot tips or getting caught up in momentum shares that are running out of steam.
Work with a Financial Adviser You Trust
It is very difficult, even for a sophisticated investor, to be completely objective about the performance of investment choices. A financial adviser can point out weaknesses in your portfolio and make recommendations to put you back on the right track to achieving your financial goals.
Diversify Among Different Asset Classes
Proper diversification is the key to controlling risk. You should never have too large a portion of your portfolio concentrated in just one or two shares. Investing in 10 different technology shares is not real diversification, because the group usually moves up or down in unison. It is wiser to invest in multiple asset classes that gives you true diversification.
Know When to Sell
No one makes an investment that they think will go down in value, but all of your investments will not be winners. It is hard to know just when to cut your losses and sell — or when to sell and take profits. Smart investors never get too greedy. They set loss limits and often sell when their investment goals are reached.
Regularly Review and Rebalance Your Portfolio
Market conditions are constantly changing, and what looks like a good investment today might not be tomorrow. Periodically review your holdings and make changes in order to keep your portfolio of investments in the right balance to reach your investment goals.
Every good investment habit you adopt will make you a better investor. Even though every investment will not work out perfectly, you will have a greater chance of achieving your investment goals when you develop good investment habits.
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Blog published by Mike Coady