Five Investment Principles To Follow
Posted on October 23, 2007 in the Investing, Money category
.There are many different ideas and strategies when it comes to investing. Here are five investment principles you can follow, as we do at The Wilson Report, to build a sound financial future for yourself.
1. Develop A Long-Term Plan:
It’s nearly impossible to reach your investment goals without a plan. You have to know where you are going, in order to get there. Here are some tips on plotting a course for your investments:
- Define Your Investment Objectives:
- Do you want growth, income or a combination of both? Do you need tax-free income?
- Know Your Risk Tolerance:
- Generally, greater risk has greater reward potential. Typically, the longer your investment horizon, the more risk you can tolerate.
- Build A Portfolio That Fits Your Objectives And Your Risk Tolerance:
- Too much risk and you’ll be too nervous and worried to sleep nights. Too much safety and you will be disappointed in your return.
2. Implement Strategies For Success:
Here are four ways to solidify your financial future. Even the best-performing investments can be made better with some simple practices that you can adopt as part of your investing routine:
- Pay yourself first:
- You pay bills every month: When you do, write a check to your investment account or have your a portion of your paycheck deposited automatically into your investment account.
- Diversify to help reduce risk :
- Grab a pencil and break it using both hands. It’s easy. Now take a bunch of pencils, bind them together with a rubber band, and try to break them. If you think of each pencil as one of your investments, you can see how spreading your money amongst different types of investments can reduce your risk.
- Reinvest your earnings :
- Do you really need the income from your investment now? If the answer if no then let your mutual funds continue to grow by automatically reinvesting all your dividends and capital gains.
- Keep a long-term perspective:
- Times change and the stock market will rise and fall. When investing, patience can be a rewarding virtue.
3. Use The Power of Compounding:
Warren Buffett is one of the greatest investors of the 20th century in part because he doesn’t try and time the stock market. Most successful investors know that with the right investment, it is better to let your investment compound over a number of years.
THE RULE OF 72
You can see how many years it will take for your investment to double by dividing 72 by the annual rate of return. For example, at 8% annual growth rate, your investment will double every nine years (72 divided by 8 = 9 years).
4. It’s Always Time to Invest:
For the long-term investor the best time to invest is right now. According to Smart Money the hypothetical value of $1 invested in the S&P 500 from year-end 1983 through 2003 earned $11.50 (versus $2.71 for the S&P 500 minus the best 17 months during that timeframe). That same dollar invested in the S&P 500 in 1925 would’ve gained $2,285 (versus $17.42 minus the best 37 months).
If you had been invested in stocks from 1966 to 1995 you would have had a total return of 560%. Had you missed the best 15 days your return would have decreased to 200%.
Not being invested in the stock market for the best 15 days over a 30 year period would have seen your return cut in half. That is the risk you take when you try and time the market. The problem is that you need to time it twice; once to get out and once to buy back in
5. Invest in Stocks:
Investing in individual stocks is the best way to maintain purchasing power, grow capital and reach long-term goals:
- While stock prices go up and down in the short-run, over the long-term, stocks outperform all other types of investments.
- Stocks can help you stay ahead of inflation. Even if the inflation rate is just 3%, you’ll need $181 in 20 years to buy what $100 will buy today. So keep an eye on the inflation rate when planning your investments.
- Invest for the long term. Individual companies have up and down years, so to reduce risk, diversify your portfolio with stocks from several companies.
What are you strategies for success?
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