General Investing 101
While the stock market can be full of uncertainty, certain tried-and-true principles can help you as an investor boost your chances for long-term success.
Here are a few fundamental concepts every investor should know
There Is No Guarantee
There is no guarantee that a stock will rebound after a prolonged decline. If you have poorly-performing investments, it’s important to be realistic about the prospect. Even though acknowledging losing stocks may feel like a failure, there is no shame recognizing mistakes and selling off investments as soon as you can to stem further loss.
Be Careful with “Hot Tips”
Don’t chase a hot tip. Regardless of the source and how trustworthy it may be, never accept a stock tip as valid. Be sure to always do your own analysis and research on a company before investing your hard-earned money. While tips sometimes may pan out, the long-term success demands more deep-dive research.
Don't Worry about the Small Stuff
Don’t panic over what happens to investments in the short-term movements. Instead, track its big-picture trajectory. It’s important to have confidence and look at the bigger picture of the investment, and don’t be swayed by short-term volatility.
Sure, active traders will use minute-to-minute fluctuations to lock in gains. However, long-term investors succeed based on periods of time lasting years or more.
The P/E Ratio
Don’t overemphasize the P/E ratio. Some investors will often place great importance on price-earnings ratios, but placing too much emphasis on a single metric is ill-advised. P/E ratios are actually best used in conjunction with other analytical processes. A low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.
Resist the Lure of Inexpensive Stocks
Some investors mistakenly believe there’s less to lose with low-priced stocks. However, whether a $5 stock plunges to $0, or a $75 stock does the same, you've still lost 100% of your initial investment,. Both stocks carry similar downside risk. In fact, the penny stocks are likely riskier than higher-priced stocks, because they tend to be less regulated.
Stick With Your Strategy
There are many ways to pick stocks. It’s important to stick with a single strategy. Vacillating between different approaches effectively makes you a market timer, and this can become dangerous territory. Take a look at Warren Buffett as an example. He stuck to his value-oriented strategy, and steered clear of the dotcom boom of the late '90s. Because of this, he avoided major losses when tech startups crashed.
Eyes on the Future
Investing is all about making informed decisions based on things that have yet to happen. Past data can indicate things to come, but it’s never guaranteed. Remember that it’s all about investing based on future potential versus past performance.
Short-term profits can often entice market newcomers, but the secret to greater success is long-term investing. Yes, active trading short-term trading can make money, but be aware this involves greater risk than buy-and-hold strategies.
Don’t Be Close-Minded
Always keep your mind open. Yes, many great companies are household names. However, many good investments simply lack brand awareness. Additionally, thousands of smaller companies could possibly become the blue-chip names of tomorrow. In fact, small-caps stocks have historically shown greater returns than their large-cap counterparts.
This is not to say that you should devote your entire portfolio to small-cap stocks, but there are many great companies beyond those in the Dow Jones Industrial Average.
It is my hope that these simple yet essential tips help you make informed and healthy fincial decisions. Until next time, happy investing!