12 fundamentals of investing

January 18th, 2011 John Evans

As newlyweds, many couples begin to think more seriously about investing money for their future together. This can be very intimidating. As an investment novice, the fear of failure and seemingly endless choices can lead many people to completely avoid investments altogether.

To help you get started in the investment world, we’ve identified 12 basic investment principles that everyone can use. These time-honored fundamentals will help you establish a solid footing for a lifetime of investing.

1. Clean up your finances before you invest. Pay off your high-interest debts (such as credit cards or department store charge accounts) before you begin investing. You are sure to save money on interest when you pay off this type of debt, which is very expensive.

2. Do your homework. Don’t trade until you understand all of the ramifications of your actions. And don’t buy or sell anything unless you truly know what it is you’re buying or selling.  Educate yourself before you make your move or solicit help from a financial professional you trust.

3. Know yourself. Have an honest discussion with your partner to understand each other’s risk tolerance. Make sure you formulate an investment strategy that you’re both comfortable with.

4. Don’t change your mind. Never change your investment strategy without a good reason. If you did your homework and executed accordingly, things should work as planned. Don’t let greed or fear take control of you.

5. Don’t let a small loss become a big loss. Don’t stick with a failing investment just to “prove your point.” Although you may love your investment, it most certainly does not love you back.

6. Don’t throw good money after bad. If your investment is tanking, do your homework and try to understand why. Don’t just keep piling more money on it. Something may have changed since the last time you researched it.

7. Stay realistic. More often than not, an attempt to make a quick buck often results in losing much of that buck. If the investment sounds too good to be true, it probably is.

8. Buy low, sell high. While this may sound like a no-brainer, the vast majority of people don’t follow this simple principle. Your ability to consistently buy low and sell high will determine the success of your investments.

9. Accept the fact that stock markets are not always rational. As an investor, it’s not always possible to ascertain why markets are doing anything. In my opinion, to be a successful investor, it’s necessary to know that markets are moving – not why they are moving. Those investors who are successful may pay attention to direction and duration. Whereas the investors with market losses may pay attention to the “why?”

10. Learn from your mistakes. Chances are you will make an investment mistake at some point. Don’t let that mistake pass without learning from it. Ask yourself what happened and why.

11. Use stop-loss orders. A stop-loss order is placed with a broker and instructs them to sell when the investment reaches a certain price. It is designed to limit an investor’s loss in a security position. If you set your stop-loss orders at reasonable limits (10-20% range) you can limit your loss.

12. Think of the potential downside first. The pain of losing is greater than the joy of winning. That’s why you should always start your research of an investment by looking at the potential downside. After all – it all boils down to risk/reward.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate to you, consult your financial advisor prior to investing.
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John Evans

About the author

John Evans is Investment Services Manager at MidWestOne Bank. He specializes in investments and retirement planning.

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