Shiny, Happy Investors- 7.5 steps to being one.
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investment mindset
The turmoil in the market means that there are people who are suffering huge monetary losses and paper losses. At these points in time, it takes a brave investor to go into the market.
These are exactly the kind of situation an investor looks for. Warren Buffet is the most successful investor for the past few decades and he swears by value investing. There are more value in the stock market when the overall market is plummeting and people start to dump their holdings and oversell.
If you had been one of the investors who bought shares of average companies during the trough of the markets in July 2007 and sold it around September, you would have made a tidy profit. But share buying looks better on hindsight. So what are the characteristics of a good investor?
1. Saves money for investments- A good investor puts aside a regular portion of the salary for investment purposes every month. If for one particular month, there are no savings because of extraordinary expenses, the good investor makes good by putting aside double the portion for the next month. Using Dollar Cost Averaging is a good method for this type of disciplined investor.
2. Stays invested- No matter what the situation is like, a good investor will hold onto a core portfolio of shares, insurance ILPs, unit trusts that he or she believes in and which they will invest small sums into it either on a monthly, bimonthly, quarterly or any other fixed regular period.
3. A small portfolio of risker stocks- The law of risk-return says that the higher the risk, the higher your returns. A good investor has shares in these types of shares but when the market turns, these shares are the first to go. That is why the amount of money in these shares are a small percentage (around 20-40% when you are younger and steadily a smaller percentage as you get older and near retirement age).
4. Diversify- This is the key thing all good investors should do. If you put all your money and bet your retirement on another Enron, you can say bye bye to your retirement. Have a spread of shares in different industries (rule of thumb -no less than 3, no more than 5 or 6). Or buy two or three shares and get another two unit trusts from different regions and markets that your shares are in.
5. Avoid churning- Stock brokers and unit trusts managers and advisors will tell you to sell this stock buy that stock and change the story around 3 or 4 months later. If they don't do that, they get $0, because no one will buy or sell. Preferably, you should be holding onto your shares for at least a year, unless you have met your target profit amount for that stock or if your stock is a risky stock and you see signs of an impending market sell off. According to Warren Buffet, the best holding period for a stock is forever. Buy on weaknesses if the fundamentals of the stocks haven't changed in that period.
6. Far from the madding crowd- When housewives (incidentally one housewife beat professional traders, post-graduate finance students etc in a Forex game in Singapore last year- shows you that the Efficient Market Hypothesis should be changed to the Law of Efficient Market or LEM for short), students, retail stall holders etc tell their buddies that they just had how many hundreds if not thousands from the stock market, that is a sure-fire sell signal. Reduce your stock holding, sell your risky stock, sell your unit trust which is doing well etc. The buy signal? When everyone tells you that the stock market is a cruel place, no one should invest and volumes fall below 1/3 of their highs during the height of a bull run. That is the signal to buy using ¼ of your money and wait to see if there are any rumblings. Repeat till money is at safety level in bank (around at least 3-6 months of your salary). This is practicing a little bit of contrarian trading.
7. Invest now- There are always people who claim to have a foolproof method and say that they are able to identify so call buy signals and be able to sell at the top and buy at the bottom. All those technical charts and candlesticks and indicators and moving averages etc etc. The problem with a lot of these is that if it was so successful, they would be the news all the time and everyone will be following what they do and they wouldn't need to advertise to sell their classes. However, having said that, the best investment time is yesterday. So if you buy today, you are already late. The power of compounding is at work. If you had invested $1 in 1901 in the stock market, you'd be a multi-millionaire, so don't wait, invest now.
These are exactly the kind of situation an investor looks for. Warren Buffet is the most successful investor for the past few decades and he swears by value investing. There are more value in the stock market when the overall market is plummeting and people start to dump their holdings and oversell.
If you had been one of the investors who bought shares of average companies during the trough of the markets in July 2007 and sold it around September, you would have made a tidy profit. But share buying looks better on hindsight. So what are the characteristics of a good investor?
1. Saves money for investments- A good investor puts aside a regular portion of the salary for investment purposes every month. If for one particular month, there are no savings because of extraordinary expenses, the good investor makes good by putting aside double the portion for the next month. Using Dollar Cost Averaging is a good method for this type of disciplined investor.
2. Stays invested- No matter what the situation is like, a good investor will hold onto a core portfolio of shares, insurance ILPs, unit trusts that he or she believes in and which they will invest small sums into it either on a monthly, bimonthly, quarterly or any other fixed regular period.
3. A small portfolio of risker stocks- The law of risk-return says that the higher the risk, the higher your returns. A good investor has shares in these types of shares but when the market turns, these shares are the first to go. That is why the amount of money in these shares are a small percentage (around 20-40% when you are younger and steadily a smaller percentage as you get older and near retirement age).
4. Diversify- This is the key thing all good investors should do. If you put all your money and bet your retirement on another Enron, you can say bye bye to your retirement. Have a spread of shares in different industries (rule of thumb -no less than 3, no more than 5 or 6). Or buy two or three shares and get another two unit trusts from different regions and markets that your shares are in.
5. Avoid churning- Stock brokers and unit trusts managers and advisors will tell you to sell this stock buy that stock and change the story around 3 or 4 months later. If they don't do that, they get $0, because no one will buy or sell. Preferably, you should be holding onto your shares for at least a year, unless you have met your target profit amount for that stock or if your stock is a risky stock and you see signs of an impending market sell off. According to Warren Buffet, the best holding period for a stock is forever. Buy on weaknesses if the fundamentals of the stocks haven't changed in that period.
6. Far from the madding crowd- When housewives (incidentally one housewife beat professional traders, post-graduate finance students etc in a Forex game in Singapore last year- shows you that the Efficient Market Hypothesis should be changed to the Law of Efficient Market or LEM for short), students, retail stall holders etc tell their buddies that they just had how many hundreds if not thousands from the stock market, that is a sure-fire sell signal. Reduce your stock holding, sell your risky stock, sell your unit trust which is doing well etc. The buy signal? When everyone tells you that the stock market is a cruel place, no one should invest and volumes fall below 1/3 of their highs during the height of a bull run. That is the signal to buy using ¼ of your money and wait to see if there are any rumblings. Repeat till money is at safety level in bank (around at least 3-6 months of your salary). This is practicing a little bit of contrarian trading.
7. Invest now- There are always people who claim to have a foolproof method and say that they are able to identify so call buy signals and be able to sell at the top and buy at the bottom. All those technical charts and candlesticks and indicators and moving averages etc etc. The problem with a lot of these is that if it was so successful, they would be the news all the time and everyone will be following what they do and they wouldn't need to advertise to sell their classes. However, having said that, the best investment time is yesterday. So if you buy today, you are already late. The power of compounding is at work. If you had invested $1 in 1901 in the stock market, you'd be a multi-millionaire, so don't wait, invest now.
7.5- Invest slowly- This sounds like I am contradicting what I said in step 7, but this step actually says that if you have $10,000 to invest, you shouldn't pump the whole sum in. You should say, divide it to 4 quarter or a half and buy it over 4 different time, maybe once a week for 4 weeks or once a week for two weeks. Better yet if you extend the time horizon a little to a fortnight you buy once. This is the power of dollar cost averaging which ensures that you abid by step 2 and stay constantly invested. This means you are buying when market is high and buying when market is down. Over time, with the stock market increasing, you will have a tidy kitty at the end of a 10, 20 or 30 year cycle and you can retire comfortably.
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