One of the problems many investors face is that they don’t really know themselves. If you want to find better success as an investor, you need to take some time to understand your wants and needs.
When you invest without self-knowledge, and without a plan, you’re setting yourself up for failure.
Know Your Goals
First of all, you need to know what you want to accomplish with your investment portfolio. The desired end result has a lot to do with with the plan you create. While it can sometimes be enough to start early and invest often, other goals require a different approach.
The way you invest if you’re building a retirement nest egg that you won’t need for 30 years is different than if you’re trying to fund your child’s college education in 10 years, or if you want to build an income portfolio to use within the next five to seven years.
Think about your goals, and why you plan to invest. The more you know about what you hope to accomplish, and the time frame you have, the better off you’ll be in the long run.
Understand Your Risk Tolerance
Another important trait to understand about yourself is your risk tolerance. Everyone has a different level of risk tolerance, and it’s important to know where you stand. There are two elements to risk tolerance:
- Financial: This is the numbers part of the equation. Look at your finances. What can you afford to lose? How much money can you put away right now? You need to know how your finances would handle a worst-case scenario. Can you afford to put $500 a month into an IRA, thereby tying the money up? If you pick the wrong dividend stock, and payouts are slashed and the value tanks, can you absorb the loss? You need to know this information before making your investing plan.
- Emotional: Don’t forget your emotional risk tolerance. If you have a high emotional tolerance for risk, you might put your finances in danger by making ill-advised and risky decisions. Understanding your appetite for excitement and risk is vital, and you need to recognize this issue and rein in your exuberance. On the other hand, it can also be a problem if you are too risk-averse. A super-low emotional risk tolerance can lead you to invest only in “safe” assets, and prevent your wealth from growing. If you have this issue, you might need to consider index funds or other acceptable-risk investments.
Look at your risk tolerance, and understand what you can handle, as well as where you might need to make changes in your behavior. This can be a big help in boosting your investing success.
Make a Plan
Can you stick with a plan? Do your best to create a plan based on what you know about yourself and your tendencies. Then, stick to it. You might need to make a few tweaks now and again, or rebalance your portfolio — but in the long run, following a plan based on what you understand about yourself offers your best chance for success.
Have you taken the time to get to know yourself in terms of investing?
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Great article – I really agree with the risk tolerance part.
A lot of people think making money from investments is easy and they don’t consider losing as an option.
But being prepared and taking the time to think about things beforehand can help you avoid disappointment both emotionally and financially.
Knowing how much risk you can take is critical while choosing investment options. Some of the most common investment disasters are changing financial goals mid-way just so you can catch-up with a lucrative investment and using emergency funds for trading.
I don’t know exactly what makes an investment a good investment, for me as long as you know that your investment has been moving forward and start earning ab bit, I think I find it somehow successful on my part. Like what I did with the least money I have, I tried joining binaryoptions-affiliate.com affiliates programs and I guess my ROI is a bit better than I used to save in the bank, it gave me a higher return, I just have to know how to ensure discipline when I trade.
My question is why do you believe that you have to risk your money to make money? I have always believed that you don’t gamble with money you can not afford to lose. Your retirement savings is NOT money you can afford to lose. There are strategies out there that can give you a secure retirement without the risk of losing all your money and can even deliver a decent return.
You have hit on one of the most important factors. Some people cannot tolerate risk or extreme market volatility and end up making the wrong decisions consistently. So this is key. It is so important the Fidelity Investments has a risk management question and answer tool to assess an investor’s risk. From there they make suggestions as to the best portfolio to meet that person’s risk quotient. Probably other mutual funds have this, but in any event readers should check this out before investing.
I think “emotional risk tolerance” is one of the least-appreciated, most-important aspects of investing. I know so many people who did the “right” think (e.g. they formed an equities/bonds split aligned with their age and time horizon) but they didn’t consider their emotional tolerance for risk. When stocks lost value, they panicked and sold, locking in their losses. The best way to avoid this is by knowing what your “gut” can handle.
This is true. Now a days, I feel like financial advisors are always trying to sell the same investment advice. I think everyone’s investment strategy should be different based on your goals.
Has anyone else ever had a bad experience with a financial investor?
I totally agree that there has to be an end goal. I hear too often that people are putting money away so that they have more tomorrow than they would otherwise, but to what end?
Too many people just invest to make money, but don’t have a plan or any concrete goals. The result ends up being getting in and out of the market all of the time, not being properly diversified and ending up with hardly any gains to speak of. It is critical to have a plan and stick to it if you want to be a successful investor.