When you begin trading/investing, there are a lot of questions. With all the information out there it can be hard to filter through and decide where to start. Setting goals can help, but often novice investors set the wrong type of goals when they decide to start investing. So how would you determine the right type of goals for successful investing?
You need to keep in mind, that we’re all unique. You can’t choose the right investment strategy until you’re clear about your own needs and what you are trying to achieve.
Before you start investing, you should start by –
- Identifying your personal and financial goals.
- Making a good budget, and work out how much you have to invest.
- Working out what sort of investor you are, and how much risk you’re willing to take.
- Investing, as sooner you start, the sooner you’ll reach your goals.
- Getting a good advice. A financial advisor can develop a plan tailored to your personal needs and goals.
Think about your goals first. Perhaps you are saving for a holiday, for a home deposit or to pay for a child’s education. Or your goal may be to boost retirement savings. You can then see that different goals have different time frame. You may only have 6 months or a year to save for a holiday but if you are saving for your retirement you might have 25-50 years. You may have several goals with different time frames. Allocating a time frame to each investment goal will enable you to think about how much you can afford to invest and how long it will realistically take you to reach your goal.
By plunging into the market and expecting to make a certain amount of money, the goal becomes almost impossible to reach over the long-term. These types of goals require that the investor actually knows the capabilities (and limitations) of the investing plan they are employing they think they actually know.
Analysts have found that the market moves from fear to greed, and back to fear. So there are times when the market is “overvalued” and other times when it is “undervalued”. As an investor you should know the potential and pitfalls of the strategy that you are employing. If you are a novice investor you must not only become knowledgeable about the market, but also about yourself.
In order to achieve great results there is a process. Learning the ins and outs of the financial world and your personality as an investor, takes time and patience, not to mention trial and error. Warren Buffet, one of the most successful investors, says, “The market has a very efficient way of transferring wealth from the impatient to the patient”.
- You can probably read books or take an investment course that deals with modern financial ideas. Scientifically, investing is a combination of science (financial instruments) and art (qualitative factors). Once you know what works in the market, you can come up with simple rules that work for you.
- Nobody knows you and your situation better than you do. Therefore, you may be the most qualified person to do your own investing – all you need is a bit of help. A very useful behavioural model that helps investors to understand themselves was developed by Bailard, Biehl, and Kaiser.This model classifies investors according to two personality characteristics: method of action (careful or impetuous) and level of confidence (confident or anxious). Based on these traits, the BB&K model divides investors into 5 groups:
a) Individualist – careful and confident, often takes a “do it yourself” approach.
b) Adventurer – volatile, entrepreneurial and strong willed.
c) Celebrity – follower of the latest investment fads.
d) Guardian – highly risk averse, wealth preserver.
e) Straight Arrow – shares the characteristics of all the above equally.
In summary, the best investment results tend to be realized by an individualist, or someone who exhibits analytical behaviour and confidence, and has a good eye for value. However, if you determine that your personality traits resemble those of an adventurer, you can still achieve investment success if you adjust your strategy accordingly. In other words, regardless of which group you fit into, you should manage your core assets in a systematic and disciplined way.
- You should bear in mind that you potentially your own best enemy. As a guardian you would be going against your own personality if you were to follow the latest market craze and seek short – term profits. And because you are risk averse and wealth preserver, you would be affected far more by large losses that can result from high-return investments.
- Generally investors adopt one of the following strategies:
- Don’t put all your eggs in one basket. In other words, diversify.
- Put all your eggs in one basket, but watch your basket carefully
- Combine both these strategies by making tactical bets on a core passive portfolio. It is observed that most successful investors start with low – risk diversified portfolios.
5. The market is hard to predict, but one thing is certain: it will be volatile. Learning to be a successful investor is a gradual process and investment journey is typically a long run. At time, the market may prove you wrong. Acknowledge this & learn from your mistakes.
You should strongly consider talking to a financial planner before making any investments. Your financial planner can help you determine what type of investing you must do to reach the financial goals that you have set. He or she can give you realistic information as to what kind of returns you can expect and how long it will take to reach your specific goals.
Again, remember that investing requires more than calling a broker and telling them that you want to buy stocks or bonds. It takes a certain amount of research and knowledge about the market if you hope to invest successfully.