Smart investing is using your knowledge to make solid investment decisions. Most investors constantly worry about making the right financial decisions, and some people worry so much that they miss great opportunities or focus on the wrong details. Maybe this sounds like you.
I use a few investing tools to help me make the best investment decisions, avoid mistakes, and take advantage of every opportunity. I'm going to show you how they work. Every investor can use these strategies to make the most of their investments. No need to worry about making the wrong decisions.
"I'm not very smart when it comes to investments."
I have heard this from thousands of investors. Don't fall into this negative pattern of thinking. Anyone can be a smart investor with the correct knowledge and a little experience. Unfortunately, most investors do not beat the market. In fact, most investors earn below average returns. Why is this?
Most investors fail because they do not use all the tools available to them. Some investors don't put in enough effort to be successful, and others don't care to learn about investing. That's why this page is called Smart Investing instead of Investing For Dummies. For smart investors with the right knowledge, a little effort can create a lot of opportunity.
Make sure you have your own investment plan before you go any further. By now you should know the investing basics, so I am going to focus on the tools for smart investing that professional investors use. These techniques can save you money, earn you higher returns, and decrease your investment risks. You will learn how to execute each one of these strategies correctly.
The 5 Most Powerful Investing Tools
These five investment tools alone can turn you into can turn you into an effective investor. Every investor can use all five of these tools to increase their returns. You probably know some of them, but it's important that you understand how and why they work. Once you know how important these five tools are, you will be more likely to use them and improve your portfolio. If you take the time to learn each one and apply all of them, you will be a smart investor by definition.
Diversification builds defense for your portfolio by reducing risk and stabilizing your returns.
This is your most powerful investing tool, but it is also the only one that will not increase your returns. Everyone has heard the saying, "don't put all your eggs in one basket," which is exactly what diversification does. Mutual funds are an easy tool for diversification. However, most mutual fund investors don't use diversification correctly; they own too many mutual funds, they hold too much in cash, or they do not invest enough money. That is not smart investing.
Once you understand how to diversify correctly, you will have a critical advantage over most average investors. You will know how many funds to buy, where to invest your money, and how to avoid losing most of your investment. Good diversification takes some of the risk out of your investments. If you diversify effectively, you don't have to worry about a few companies going bankrupt, or a country's economy slowing down. This will make you less fearful about investing, so you will invest with confidence and focus more on what matters to you.
The second most important tool is compound interest, which can generate massive returns over time.
Compound interest is the momentum in your portfolio. Have you ever wondered how some people can leave their investments untouched over a few years and generate huge returns? The answer is compounding. Reinvesting your earnings is a simple way to boost your long-term returns and take advantage of low prices on your investment. If you understand the advantage of buying at the right time, then you need to understand this tool and use it. Reinvesting is also the easiest investment strategy to use, you can literally "set it and forget it".
Dollar cost averaging can also improve your long-term returns and lower your costs.
Dollar cost averaging is a fancy name for investing a specific amount on a regular basis. You are already dollar-cost averaging if you are regularly contributing to a 401k or retirement account. Most people do this because it's convenient, but they don't take a few minutes to learn why it is so effective. This tool is also easy to setup, and doesn't require much attention once it's going. If you have a job with a regular paycheck, you can easily setup dollar cost averaging on your investments.
Contrarian investing is another very useful investing tool.
This strategy takes advantage of opportunities that the majority of the market misses. That sounds like smart investing already, and I haven't even explained how it works! Smart investors understand the difference between a price of an investment, and the value of an investment. The price of a stock may move drastically, but the value of that stock remains the same. You can use this tool in a number of different ways to profit from average investors.
However, too many people translate contrarian investing into "buy low, sell high," which misses the point completely. Value averaging is one example of that philosophy, which has some advantages and disadvantages. A good contrarian investing strategy doesn't try time the market, but it does try to measure value and analyze where the best opportunities are. You can learn where to find the best bargains with the right knowledge and a little effort. This strategy has paid off over the long term for investors like Benjamin Graham, Sir John Templeton, and Warren Buffett.
The last smart investing tool is real return analysis, which is basically a "bottom-line" investment approach.
The term real return refers to an investment's profit after investment fees, sales charges, taxes, and inflation are considered. Most mutual fund investors consider inflation and taxes as an afterthought, which is one reason why they earn less-than-average returns. These two critical details will reveal some important information about your investments, and lead you to the best decision.
You should understand how taxes and inflation affect your investment before you invest. No one likes to pay taxes, and inflation only takes away from your investment returns. A retirement account is a great way to not pay taxes. Real returns analysis can help you compare different investments and retirement plans to make your decisions easier.
How To Make The Right Investment Decisions
I don't like wasting any of my time or money when investing. This is the single most important principle you can use when investing: don't waste time or money. Keep this in mind when making any investment decision, so you can stay on track. Here are a few guidelines to help you make better investment decisions.
Time management is critical. All five smart investing tools are powerful because they are easy to use and take very little time.
Managing your mutual funds shouldn't take much time, and the more you invest, the less time you need to spend. You should be able to manage your time well enough to dedicate an hour a week to track your performance and manage your investments. Of course, you can spend more than an hour a week managing your investments, but it won't get you significantly better results.
My site blog usually has only one or two updates per week to keep you up to date, which makes it easy to fit into an hour. You can also subscribe to my RSS feed to have the most newest articles sent to you.
Focus on the two aspects of your investment that you can control: how much you invest, and what you do with your investments. First, decide how much you decide to invest. Set aside a comfortable percentage of your salary to start with, and increase the level gradually. You are already investing? Challenge yourself to increase the amount you invest. So you don't have enough money to invest? Focus on increasing your income, then invest the extra money.
You also have full control over what you choose to do with your investments. Use your investment plan to help you decide. Even if you have a financial advisor, the decision is always yours. Don't be afraid to change your investment if you find a mutual fund with higher returns or lower costs, with comparable risks. Take responsibility for your finances and learn everything you can about your current investments. Don't be afraid to ask for help or a second opinion.
Focusing on these two things will save you stress and prevent you from making an emotional decision about your finances. This can be a costly mistake.
Finally, if you don't understand something, don't invest in it.
This simple rule will likely save you money and stress. Also, use your time and effort wisely by focusing only on what you can control. This will prevent you from worrying about the daily ups and downs of the financial markets and media hype.
Here are the five guidelines you need to remember:
-Don't waste your time or money.
-Focus on how much you will invest.
-Use your investment plan to help you decide.
-Learn as much as you can about your investments.
-If you don't understand something, don't invest in it.
Apply Your Knowledge
Smart investing means taking advantage of every good opportunity. You can save money and earn higher returns by using all of these investment tools. These tools are simple to learn are simple for anyone to learn. Once you understand them, you can easily outperform the novice investors. The only two things you need to bring are your motivation and common sense.
You will gain investment experience as you continue to improve your investment strategy, and your experience and knowledge will help you determine which investments are best for you. Having an investment plan is critical to getting the results you want. Any time that you spend developing your investment plan is time well spent.
Michael Hayes is a mutual fund specialist, writer, and personal investor.
"I have helped other investors for over 5 years in the financial industry, but I love investing on my own. My dedication to sharing ideas and investment opportunities with other investors is what motivates me."
He runs Great-Mutual-Funds.com, a website dedicated to finding the best mutual funds and helping others invest like a professional.
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