Investments are all about decision making and if you don’t make the right decisions, you’re going to lose money. A lot of new investors don’t quite grasp this and they think that it’s a case of just putting your money in and waiting for the returns. Unfortunately, it’s not that easy and unless you know how to choose the right investments and when to cut your losses, you won’t get very far. But making good investment decisions is easier said than done and it’s an art that takes a long time to master. There are a lot of different things to weigh up before making a decision and you can’t afford to rush into things. If you don’t know where to start, these are some of the best ways to make better investing decisions.
Establish Your Goals
When you are trying to decide how much money to invest and where to put it, it’s important that you have an end goal in mind. It might be saving up some money for retirement or paying for your kid’s education. Whatever it is, you need to have a clear investment goal before you get started. If you have a goal that you are working toward, it helps you to make informed decisions with your money. For example, if you are trying to save for retirement and you have another 20 years before you retire, you know that you can afford to take a few more risks in the hope that they will pay off. If they don’t, you still have time to make that money back. But if you are planning to retire in the next few years, you are best off sticking to safe investments because any big losses now will stop you from reaching your goals.
Don’t Let Emotions Get In The Way
One of the biggest mistakes that new investors make is letting their emotions get in the way and there are a couple of ways that this happens. If you are investing in stocks and you are looking at different companies, it’s important that you don’t let your own opinions cloud your judgment and you make decisions based on the facts. So many people invest in a company because they think that the product is great and they love the company. But just because you love the company, that doesn’t mean that they’re going to be a success and you should put your money behind them. If you are going to invest in a company, you need to do your research first. Does it have an edge over the competition? Has the company shown steady growth over the last few years? These are the things that you need to think about.
Emotional investing can also cause snap decisions that might not be the most sensible. For example, if a stock dips in price, you might panic and sell your shares right away so you can avoid further losses. Equally, people get too overconfident when their investments are doing well and start pumping more money in. But these short term fluctuations don’t guarantee success or failure and it’s important that you don’t let your emotions get in the way, otherwise, you’re going to make poor decisions.
Always Consider The Fees
When you make an investment, it’s likely that there will be fees of some kind that you have to pay. If you ignore the fees when deciding between investments, you might find that your profits are nowhere near what you expected them to be. Always check things like fund management fees before you make your decision, so you know exactly what the cost of the investment is going to be. Even if one investment promises better returns than another, your overall profit might be lower if the fees involved are very high.
In particular, you need to look into the taxes that you will have to pay on your returns. If the taxes are high, you might not take home that much at all. It’s often better to find investments with a smaller return and lower taxes, and put your money into retirement funds instead of investments that are heavily taxed.
Consider What You Can Afford To Lose
This is so important but sometimes, emotional investing can lead to people putting in more than they can afford to lose. Regardless of how sensible you think you are being, no investment is ever completely safe and there is always the chance that you will lose out. That’s why you need to consider how much you can actually afford to lose if things don’t go your way and set that as an investing limit. If you exceed what you can afford and your investment doesn’t pan out the way that you had hoped, you could find yourself in some serious financial trouble.
It’s also a good idea to keep a separate emergency fund aside, and don’t invest any of that money. If you build an emergency fund and keep that separate from the rest of your savings and investments, you always have something to fall back on if your investments turn bad. Without that safety net, your financial security is entirely dependent on the success of your investments, and that’s never a good position to be in.
Know When To Cut Your Losses
One of the most important skills that you need to learn if you are going to be a successful investor is when to cut your losses. It’s important that you don’t let your emotions get the better of you and cause you to panic, but so many people hold on to their losses for too long and it just makes their situation worse. If a stock doesn’t go the way that you hoped it would and the price starts dropping, it’s best to just get out now. That way, you have control over your losses and you can limit them. But if you hold on in the hope that things will improve, you massively increase the risk. In some cases, you might get lucky and the price will bounce back. But a lot of the time, that won’t happen, and eventually you will be forced to sell anyway, but you will lose a lot more.
Making good investment decisions is a skill that takes time to develop and you will never get it right one hundred percent of the time, but if you follow these tips, you should be able to minimize losses.