10 Things An Investor Must Do Before Investing

Here are ten important things to remember before you take the next step in your investing journey. These are real world keys that you should embed into your conscious brain to help you become a consistently smart and profitable investor.

1. Understand and control the fees and costs of your investing activities.

Ask your broker how they charge for stock and option trades. Shop around and try other brokerages. Don’t be shy. You must find a brokerage and platform with which you feel comfortable.

In addition to brokerage commissions, be aware of and minimize advisory charges (if you choose to use an investment advisor), mutual fund loads (buying and selling), expense fees for ETFs, the tax consequences (always keep your tax adviser in the loop) of your investing, and closely monitor the overall rate of inflation, which can eat into or destroy your apparent profits.

2. Diversify, diversify, and then diversify.

Have you heard that before? Sure you have. Typically, the best way to accomplish this goal is to create a good asset mix. Some people think they have diversified if they have many different stocks in their portfolio, but nothing else. This is not true diversity. The assets are all the same.

Make sure in your real portfolio that you have a mix of bonds (corporate and U.S. Treasury), commodities like gold and silver bullion, and international stocks/bonds as well. Also, consider the important time component. Along with the obvious (timing a bond’s maturity date correctly), you should consider assets that project to appreciate at different times and plan accordingly.

3. Understand your risk.

No, really understand your total risk. You may have a clear picture of the relative risk associated with each investment you purchase. However, have you considered the related risks between investments? For example, what is the source of your cash flow with which you live? Are you an employee or a self-employed businessperson? Have you considered what may happen if your cash flow were to stop? Would you be forced to sell your investments before you wanted to?

This risk to your portfolio has just greatly increased if you never considered it before. This risk may one day force you to lose money by selling at the wrong time. Many investors have been forced to sell their investments at market lows because they had no other choice – they needed the cash!

You might also be unable to make other timely purchases during a market low because of your lack of cash flow. This is just one example of the additional risks that you might easily overlook when creating your investment strategy.

4. Understand percentages.

Don’t look at how much the price of an investment went up or down in dollars and cents or “points” – look at its percentage gained or lost. Like casinos that issue worthless plastic chips in order to more easily separate you from your money, you must understand the value of each asset you are holding and understand how much each price change impacts your overall portfolio value.

The easiest way to understand how investments are changing in value daily, weekly, monthly or yearly is through percentages. Google (GOOG) went up $5 today and your General Electric (GE) stock went up 50 cents – which performed better for you? That’s a 1% return for GOOG but a 3% return for GE! Further, if the Dow Jones Industrial Average went up 500 points today for a 5% gain, why did your GOOG and GE underperform the market? Pay attention to the percentage changes in all of your assets and compare them to common market benchmarks!

5. Avoid buying “hot” stocks, rather you should invest in what you know.

Surprised? By the time a stock is considered “hot,” you’ll probably pay too much for it. The amount of press and TV time they command often attract many investors on the buy side, which drives the price up to possibly dangerous “bubble” levels. If you like a hot stock or investment, wait a few weeks or a month to revisit the security. By then, it has probably been replaced by a new “hot” stock and may now be priced more attractively.

A better method of investing is to buy what you know. Open your eyes and look to see where you and your friends are spending your money—and where you are NOT! Your own personal and professional knowledge of companies and their products is usually more than enough evidence for you to start doing some fundamental research on their stocks. Investors who stick to what they know and ignore what they don’t know have made many fortunes.

6. Use Fundamental Analysis to identify what to buy.

Fundamental analysis is a first step in researching possible investments: For stocks, what are the company’s PE ratio, product lineup, and management? For CDs and bonds, where is the overall economy in the business cycle; what are bank CDs and bonds yielding? For commodities, what is in demand now and what will be in high demand in the future for assets like Oil, Gold, and Wheat? This will tell you what is currently undervalued, what is overvalued and what the future is likely to bring for these investments.

7. Use Technical Analysis to help you decide when to buy.

While Fundamental analysis can tell you what to buy, Technical analysis tells you when to buy. After all, what’s the point in making an investment and having to wait 20 years before you make money and your fundamental analysis is proven correct?

That’s why technical analysis indicators like price action and volume play key roles in your life as an investor. Common chart patterns and trend lines will easily guide you in knowing when to buy and when to sell investments that your fundamental research has told you are solid places to invest your money. Technical analysis works not because it is a secret, but because every good investor knows about it, uses it and follows it.

8. Set reasonable goals.

And know that if you outperform the market by 5% then you are doing great! Understand that it is really diffcult to beat the market as measured by a benchmark like the S&P 500. Like a fruitless attempt at achieving perfection, constant striving to “double your money in a year” will bring you disappointment. Instead, create a strategy and portfolio that suits the amount of money you have to invest, protects you against downside surprises, projects returns higher than inflation, and “gives you comfort.” Create a realistic investing goal that is achievable. Remember that over 90% of professional mutual fund managers fail to beat the S&P 500 stock market index. You shouldn’t expect to beat it either, at least not right out of the gate.

9. Be objective, not emotional.

FEAR and GREED are your enemies. These two emotions can be seen in every market, every day. They drive markets up and down and make them gyrate without seeming to make sense. That’s fear and greed at work.

When you start to become emotional about your investments, your previously successful portfolio can be turned into a train wreck. Understand that objective investing is always the smartest strategy component. Have solid reasons and goals for making every investment decision and ask yourself: is greed or fear is playing a role? And stick to your plan!

10. Be an independent thinker.

This is easier said than done and sometimes can take a lifetime of experience before you achieve it. However, if you interviewed the top ten investors on the planet, all would stress that you must invest independently. This doesn’t mean you should totally disregard all suggestions from your broker, other experts, friends, or family. It does suggest that you view all such recommendations with a careful, critical eye.

Do your own research, investigation, and evaluation – remember, it’s your money. Treat recommendations, regardless how strong they seem, as just another information source – not a fierce call to action. One way to become an independent thinker is by reading many different opinions and then coming up with your own opinion based upon the facts that you can see.

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