How to Invest Successfully?

by Invisor
Last updated on octobre 31, 2014

Investors often feel frustrated with their investing experience. In most such cases, it is because emotion gets in the way of their decisions as people react to rumours, opinions or ideas not thoroughly researched (or ideas backed by no research at all), which tend to do more harm than good.

As a result investors end up TRADING, not INVESTING. What is the difference? Trading refers to buying & selling securities to profit from a situation based on a short-term idea; while investing is based on fundamentals and a long-term approach.

Markets are generally efficient in that information gets priced into security values much faster than human eyes can see. Remember that there are professional, institutional-sized traders in the marketplace with millions of dollars in risk capital, consuming real-time market data and information to make several trading decisions within tiny fractions of a second! As a result, by the time information disseminates via the ‘slow’ internet to most investors sitting in their homes at their kitchen tables or workplaces, security prices have already moved; meaning any short-term profit making opportunity (even if it did exist) has already been marginalized.

For most traders, in the short term, markets are no different than Casinos. In other words, the chances of winning consistently based on short-term decisions are very low and they end up buying high and selling low in most cases. Unfortunately, when you speak to folks that have traded and ‘claim’ to be successful, you may only be hearing the ‘winning’ stories and not those that almost wiped them out. This would lead one to believe that making money consistently by trading is fairly straightforward. Through experience I can certainly say, it is not!

Be an Investor; not a Trader
Recognize the difference between Investing (long term perspective) and Trading (series of short term decisions) – they are not the same and generally result in substantially different outcomes. The key to successful investing in the long term, therefore, is to follow a few simple steps:

  • Keep your emotions away from your investment decisions by having a financial plan and an investment strategy aligned with your goals. E.g. think about how much money do you need in retirement to maintain your lifestyle? How much money do you need to save up to meet that goal? Commit to saving money on an ongoing basis to meet your goals. How much risk are you willing to take? What asset classes do you invest in and in what proportions? All of these elements should be part of your plan. Seek professional advice to help you with this process;
  • Implement your plan with highest level of discipline, rebalancing your portfolio to your strategic asset mix on a regular basis;
  • Keep costs low as they tend to add up to a significant amount over time particularly considering the compounding effect, and result in a substantial drag on your portfolio;
  • Avoid some of the common mistakes investors make such as having too much or too little diversification, believing that higher risk help earn higher returns, chasing hot performance, exiting too early, and investing based on historic performance and not projected experience.

Investing can certainly be a pleasant experience. All you need is a long-term mindset, an investment plan, a well-diversified portfolio to sustain tough market conditions, and some professional help to ensure you keep your emotions out of the game and make the right decisions to remain on track towards your goals.