Investing isn’t just about money. It’s about who you are as an individual and how you can use your knowledge of the stock market to impact the world in meaningful ways. Read on to learn more about the real art of investing and how it can have a positive impact on your life and the lives of others, no matter what your financial status might be.
Don’t Follow the Herd
The art market is a classic example of herding behavior. It tends to follow its own trends, fashion and fads rather than logic or good sense. The result is that prices can change dramatically for no discernible reason.
Sometimes these changes are positive and at other times they aren’t, but as a general rule, trying to anticipate a trend based on fundamentals will rarely work out in your favor.
Buy stocks in companies you know
Many people think investing means buying stocks in companies they know nothing about. While that may seem counterintuitive, it can be easier and just as profitable to buy into a company you know more about.
For example, you could buy shares in your employer’s stock. Or you could invest in a fund made up of companies within your industry, even if they’re not directly competing with each other—you get better diversification that way.
Always buy low and sell high
If you’re going to make it in investing, you’ll need to learn how to do one thing well: buy low and sell high. The most common practice is to buy when a stock is low and sell when it’s high. But that doesn’t mean you should never buy at a high price or sell when a stock is low. If you have an investment with real potential, sometimes buying at a high price makes sense.
Having an understanding of business helps to make good investment decisions
When you think about investments and what is worth your money, a huge part of your decision making process includes two things: how much you have to invest and when will you need that money. These are factors that aren’t necessarily affected by understanding business. In fact, they don’t really involve numbers or mathematical formulas at all. However, in order to make good business decisions, it is extremely important to understand some basic concepts related to money management and investments.
Wait it out
Buying something at its lowest price is not always a smart investment. A more time-honored approach is to make strategic investments in things like stocks and bonds, then wait for them to appreciate over time. In some cases, investments will increase in value immediately; other times, they’ll appreciate gradually over a period of years or decades.
Don’t invest in index funds blindly
Even though index funds are the market, it doesn’t mean you should just invest in them blindly. It means that before you invest, ask yourself what their purpose is.
Are they a source of capital or part of your long-term investment strategy? If you don’t know what their role is, then you don’t know whether or not to buy them. This principle goes for anything—pens, socks and yes, even index funds.
Avoid Mutual Funds
Mutual funds, while theoretically diversified, can have high fees and are not tailored to your specific investment goals. If you want to grow your wealth over time and let a financial professional manage your money, hire a fee-only registered investment advisor. If you’re working with a financial planner who is compensated based on how much he sells you (think 12b-1 fees or commissions), run away as fast as possible.
Buy undervalued stocks
In short, there are two ways to pick winning stocks. The first is to look for emerging industry trends and buy shares in companies that you think will benefit from these trends.
The second way is to identify companies with good management and solid balance sheets and buy their stock before they announce a big acquisition or some other news that will move their share price up.
Don’t forget dividends!
If you don’t take advantage of dividends while you invest, you are missing out on a massive opportunity. Imagine that you buy a stock for $100 and it pays a 4% dividend. That means in one year alone, your initial investment will grow by $4 to $104.