5 Principles to help become a better investor

Published by on

You don't have to be a financial expert to start becoming a better investor. Here are 5 steps that can help:

1) Create a long term plan and follow the plan.

Know where you want to go and when - then start building the steps to get there.

You don't have to do this on your own and it's important to include the people closest to you (ie. spouse). A professional financial advisor can help you determine realistic steps aand provide tips on budgeting and tax savings to help achieving your financial goals easier.

Two other considerations - a) Leave some extra cash for short term needs so that unforeseen expenses don't throw your long term plan off schedule. b) Consider insurance to protect your family and your financial plans for the future. 

2) Learn to control your emotions. When market volatility impacts your investments, it's important to realize the difference between temporary changes in portfolio valuations and what can really impact values over the long term. Jumping out of the markets allows you to be wrong twice - when you got out and figuring out when to get back in.

The same is true about being over exuberant when markets are surging. Taking on too much risk at inappropriate times can get investors in trouble at the next market correction.

3) Become disciplined and patient. There's an old saying - "It's not timing the markets, it's time in the markets that will make you a successful investor."

There are no shortcuts and be very careful about the latest "flavour of the month" investments that are promoted. (See 5 below) You've made a long term plan - stick with it.

4) Diversify - A well balanced, diversified portfolio doen't guarantee the end of volatility. But it generally softens the blow when things get rough and helps keep you stay invested to take advantage of the recovery.     

A one investment portfolio - including real estate - can be too risky and isn't very liquid when that one type of investment has gone out of favour with potential buyers.

5) Never lose that healthy level of skepticism. A good investor asks enough questions to be comfortable about the purchase he or she is making. If the investment sounds too good to be true, it probably is. If you can't get answers from the person selling the investment, don't write the cheque. There's nothing wrong with taking some time to consider the purchase. It can save a lot of grief when you go to sell it.

In summary, you can hire a good financial advisor for their investment expertise but these 5 principles will go a long way to making you comfortable and successful with your investments.