September 14 2009|05.07 PM UTC

Silicon Valley Blogger

Lessons I’ve Learned As A Long Time Investor

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This guest post is brought to you by the Silicon Valley Blogger from The Digerati Life, a dame who enjoys the stock market, personal finance and of course, blogging!

When I first started investing, I was young and naive and did not have much of an investing plan. But I made a commitment to become a better investor. While it took a lot of mistakes and trial and error for me to become comfortable with the process, I eventually put together an investment plan that I’m happy with and which I now conform to as much as possible.

I’d like to share some thoughts and hard-earned lessons on this subject so you can avoid the mistakes I’ve made. To give you some idea, from the time I began investing around 20 years ago, I’ve been able to multiply my assets by a factor of 300. This was all achievable by simply relying on the long term upward trends of the markets as well as participating in automatic savings and investing programs that allowed me to contribute to my funds on a regular basis.

That said, here are some of my favorite investment tips, culled throughout the years:

Investing Lessons I Learned As A Long Time Investor

1. Invest early.
The earlier you start investing, the better. That’s what conventional wisdom tells us. Well, I can certainly vouch for this principle as someone who started investing right out of school. The power of compounding works wonders on your portfolio as your assets grow exponentially over time during strong investment periods. Time also allows your portfolio to recover from temporary drops so it pays to hang tough if you believe your investments are good ones that can pay off with patience. You can start out by signing up with a good mutual fund company or online broker (you can check out this Scottrade review or TradeKing review for some ideas) and perusing their free online resources.

2. Invest regularly.
Investing regularly is a great strategy for building your investments over time. When you employ a dollar cost averaging approach, you end up buying more shares of stock when the market is down and less shares when it’s up. This is a surefire way to accumulate shares which, over time, increase in value as the market rises. The premise here is that the market will go up in value over the long term as the underlying economy prospers.

3. Diversify and manage risks.
The most important investing lesson I’ve learned was to figure out how to diversify my portfolio. Because investing involves risks, one way to counteract and manage this risk is by dispersing one’s funds across various investments, also known as asset classes. This process involves developing a plan that calls for identifying how much of each asset class to buy and hold. If you can divide your money across categories such as cash (savings accounts, money market accounts and CDs), bonds, stocks, real estate, precious metals and other diversifiers, you stand a better chance at limiting the risks to your money.

4. Keep your eye on the long term.
One of my earlier mistakes was to engage in a lot of market timing and trading. I was not aware back then that I could actually make money gradually by keeping myself more focused on the long term and by adhering to my stock investing goals. I only began to make headway with my investments when I opted for a more long term financial strategy that involved steady saving and investing, along with proper diversification. If you can stay patient and keep the faith, you’ll be pleasantly surprised with how your portfolio behaves over time.

5. Invest with a strategy, not with emotion.
When things go wrong — say when the market takes a tumble or when financial situations change — a lot of people end up abandoning their financial plans. Let’s assume that you’ve created a pretty solid investment plan. Lots of people had such plans prior to our most recent stock market meltdown — the one that was fueled by the real estate collapse and credit crisis. Unfortunately, many investors decided to act on emotion, bailing out of the stock market completely. Making short term moves like this can make you vulnerable to even larger financial setbacks; when you decide to react to market volatility by bailing out when the market is low and buying back when it has already rallied, your impulsive actions are bound to eat away at your funds. By selling low and buying high, you’re guaranteed to lose money!

6. Avoid making costly mistakes.
Try to avoid making investing mistakes because they can get pretty expensive. Imagine investing in the wrong stock — by putting all your eggs in that one basket that decides to implode, you could pretty much get wiped out overnight. This has happened to me more than once during my early years as an investor. By avoiding mistakes, you’ll give your money a chance to grow over time and build on your profits. If you don’t have the experience to trade stocks or time the market, then don’t do it. If you’re uncomfortable with a particular investment, skip it. Accept your limits and go for those boring investments that help you grow your net worth over time: if need be, don’t try to beat the market — simply match it with index funds!

A lot of people have been skirting the stock market lately because of its volatile behavior. I think that there are a lot of opportunities to be had when markets fall. Sure, risks abound, but with risk, you’ll also find reward. If you’re able to understand and control the risks you face as an investor, and if you remain patient, systematic and strategic about the process, then you’re bound to be rewarded. So why not get started with learning about investments and the markets as much as you can?

photo credit: travel_aficionado

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{ 1 comment… read it below or add one }

Cory September 15, 2009 at 12:51 pm

Look up the returns on SPYDERS(SPY) and DIAMONDS(DIA) for the last 10 years. What lessons does that teach us? Barely beats inflation and taxes (actually negative for DIA). How much “long term” can you get? You are better off with bonds and CD’s instead of stocks.

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