Thursday, July 10, 2008

Five Simple Tips For Successful Investing

You don't need to read thousands of books about the stocks market to be a successful investor. Investing is not about reading charts or being a soothsayer. Neither it is about watching screens with numbers all the day and night. Successful investing is about being patient, having reasonable expectations and sticking to the main investment principles.

Sounds complex? Here are five simple tips that will help you to do all of this:

1. Use smart diversification. Everyone says you should diversify but only few people warn about the pitfalls of over diversification. When you diversify so much that you almost own equal shares of everything in the market, you can't perform better than the market itself. When the market falls, your investment portfolio will fall too.

To avoid this, you should balance between the diversification and the risk. That's what I call smart diversification. Choose enough different assets so you don't depend on only one, but don't try to have everything. If no investment holds more than 15% of your overall portfolio, you should be fine.

2. Invest in different kinds of assets. Many investors make the mistake to buy only stocks, or only mutual funds or only real estate etc... you got the idea. Sure, they diversify in different stocks, funds, properties etc, but what happens if the property market crash?

If you want to be safe, invest in different kinds of assets.

3. Don't follow the crowd. Another mistake that many investors make is to do what everyone else does. What happens then? The price of the "hot" investment goes up and up much above its real value, because everyone wants to buy it. Just see the homes market in USA and Europe. Sooner or later this balloon bursts and a large part of the mass investors end up losing big time.

Your path to successful investing goes through some creativity. Avoid doing what everyone else is doing and find what works best for you.

4. Invest regularly. How many times you've heard someone saying that they made a big investment but it didn't work out? Often such people complain that investing is useless activity in general. Would you agree with them? I would not.

Investing does work, but it's not one time effort. It must be done regularly - even if only with small contributions. The real power of investing can be revealed after you invest month after month, for years. No one says it's easy and quick way to build wealth.

5. Use the power of compounding. Persistence is one of the most important keys to investment success. If you invest again and again and don't take out the profits, you will be able to see one of the greatest financial magics - the power of compounding at work.

Take this example: if you invest $100,000 and make 12% profits per year, you will be able to earn $12,000 yearly or $1,000 per month. This will bring you a nice passive income, but wouldn't make you rich. If instead of getting our the profits you let them compound for 25 years and add just $1,000 per year you'll end up having $1,7 millions!

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