How can you invest successfully?
Meditating, riding a unicycle, or meditating while riding a unicycle: we are all good at something. You can also become good at investing. But there are four basic things you must consider.
1. Know yourself
You don't have the same taste in music as your aunt, or the same favourite color as your neighbour. You are unique, one of a kind, and the same applies to you as an investor. Your financial situation is unique, and your financial ambitions should be too.
Before anyone starts investing, it is therefore a good idea look in the mirror and ask yourself these questions:
- How does the product work that I want to invest in? Do I understand it well enough to explain it to someone else?
- What do I want to achieve with my investments? Is safety my priority (taking as few risks as possible)? Or do I want to achieve substantial growth (which means taking more risks)?
- What would I do if my investments were down 1%? Or 5%? 10%, 20%, or more?
- What are the risks of this investment? Do I feel comfortable taking these risks? Have I understood that risk and potential return go hand in hand?
- How much do I want to earn from this investment? Is this realistic?
- For how long do I plan to invest: a year, five years, ten years, more?
- What are the costs of buying, holding and selling the investment? Do I pay tax on the money I earn?
- What other investments do I already have? How does this investment fit into my broader financial picture?
These questions will help you make the right choices. For example, maybe you want to invest for three years and then perhaps buy a property. Would you lie awake at night if your investments were down 5%? If so, shares are likely not right for you. Are you aiming for a return of 6% per year, can you do without your money for 10 years, and would you buy more if your investments were down? If so, euro zone government bonds are probably not the right choice for you.
Actually you should ask yourself the above questions at least once a year. After all, your financial situation and plans can change, which in turn can change your appetite for investment.
2. Diversify your investments
Eat deep-freeze pizza every day? They say it's not very healthy. Diversity is also better for your investments. The stock exchange is like a buffet restaurant: there’s something for everyone. But if you always put the same thing on your plate, you expose yourself to a high concentration risk.
Suppose someone invests in two shares and has bad luck, because one does very badly. This will have a very strong impact on the overall return. If they spread their investments across many different products (hundreds of different shares and hundreds of bonds), different sectors, different markets, etc., the impact will be smaller if some of them perform poorly.
You can diversify:
- By product. With shares, you can also diversify your investments across different types of shares. The same applies to bonds.
- By sectors and themes
- By geographical areas
- Over time (i.e. not investing everything all at once)
- By different managers, when you invest in funds
Diversifying does not necessarily mean that you have to buy 1,000 different individual shares or bonds. A simple solution could be to opt for investment funds or trackers. These are "baskets" that contain dozens – or even hundreds – of different shares and/or bonds. You invest in one product (the fund or tracker) and don't have to buy the different shares and/or bonds individually.
By investing in an MSCI World tracker, for example, you will have invested in more than 1,550 shares from 23 countries and covering all the main sectors.
3. Time versus timing
Timing the market means that you buy when prices are low and sell when prices are high. You may have luck on your side a few times now and again, but you will miss the boat sooner or later. Sports commentators often predict winners at the start of a season, and are then overtaken by reality. In the same way, investors often try in vain to predict how the markets will move.
Time is one of the best trump cards for an investor. This is particularly true when markets turn volatile. At these times, many investors sell and/or sit on their money on the sidelines, waiting for the perfect time to (re)enter. It is important to understand that it is rarely possible to time the market. Also, stock markets may fluctuate sharply in the short term, but they show a rising trend over the long term. This means that an investor who remains in the market has a greater chance of long-term success than someone who tries to choose the perfect moment to invest.
Being successful as an investor requires discipline. After all, investing can be emotional – especially if everything is flashing red and "everyone" seems to be panicking. Impulsively pulling the plug, however, is rarely a good idea.
To maintain discipline, it is important to first tick the three other basics. Know who you are as an investor (and align your investments accordingly). Diversify. And keep your eye on the long term. If these "rational" aspects are in good order, there is far less room for emotions to color your decisions.
Of course, there is nothing wrong with emotions as such, but it is better to keep a cool head if you want to invest successfully. And it is equally important to maintain discipline in bad times as in good. Joining in the panic can lead to losses. You can also get swept away by euphoria.
This article does not contain any investment advice or recommendation, nor a financial analysis. Nothing in this article may be construed as information with a contractual value of any sort whatsoever. This article is intended for information only and does not constitute in any way a commercialization of financial products. Keytrade Bank cannot be held liable for any decision made based on the information contained in this article, nor for its use by third parties. Every investment entails risks such as a possible loss of capital. Before investing in financial instruments, please inform yourself properly and read carefully the document "Overview of the principal characteristics and risks of financial instruments" that you can find in the Document centre.