If the ongoing COVID-19 pandemic has taught us anything, it is that we need to have our finances in order and a long-term plan for our futures. Many people lost what seemed to be secure jobs. Others saw their working hours and, therefore, their salaries reduced, leading scores of people left wondering what the future has in store. Investing in the stock market is a great way to grow your savings or prepare for your retirement. However, the world of stocks and shares is a minefield where the potential to lose your hard-earned cash is a real possibility. Follow these tips to start on the right track.
Getting your finances in order is the first step to becoming a successful investor. A doctor will not write you a prescription without first making a diagnosis, and you should not consider investing until you have done some thorough planning. You need to know how much money you have available for investment. The plan is to invest this money for the long term, so it is essential you do not need it. Make sure you are not laden with debt because your investment money will almost always be used to better pay off creditors.
Do Your Own Research
Word-of-mouth goes a long way when it comes to choosing which companies to invest in, but there is no substitute for performing your own research. Similar to how you would not choose a sportsbook bonus without knowing the terms and conditions, you should never invest in a company just because someone has said it is a good thing to do. Think like an owner because you are investing in businesses, not just stocks. Look at how profitable a company is, consider if the company pays dividends or not, and discover how resilient the business is to outside influences. For example, consumers will always use food companies or medical-related businesses, but air travel was severely damaged by the aforementioned pandemic and is vulnerable to rising fuel costs.
Diversity is the Key
Everyone has a strategy when it comes to investing, but the very best investors ensure their portfolio is diversified. Remember the old adage, “don’t put all your eggs in one basket”? It runs true when playing the stock market. Mega investor Warren Buffett, Chairman, and CEO of Berkshire Hathaway Inc., is an advocate for diversification. You do not have much choice but to invest in one or two companies when you first start buying stocks and shares, but you should try to cover as many bases as possible once your portfolio grows.
For example, you do not want all of your $10,000 investment to be entirely tied up in tobacco shares in case something happens to the tobacco industry that wipes value from your investment. It would be far better to have something like $2,500 in tobacco, $2,500 in oil, $2,500 in pharmaceuticals, and $2,500 in technology. Should something happen to one or two of those industries, your investment is still working for you elsewhere.
Focus on the Long-Term
Investors carefully select their stocks and tend to stick with them long-term. You should aim to keep a stock for at least five years in order to ride out the short-term peaks and troughs. Many factors cause a stock’s price to fluctuate in the short term. Even someone selling a few thousand shares can cause a price drop. Look at any stock’s price over a month, and it will be up and down. However, look at it over five or even ten years, and the graph is far smoother. Indeed, regularly monitor your portfolio but do not give too much weight to short-term fluctuations.