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If you're a first-time investor, take note of these important tips
By James Yeo
Investing your money is one of the most important steps a person can take towards being becoming financially independent. However, many first-time investors are also apprehensive about losing their money, given the many horror stories they might have heard from friends or family.
With that, here are four important things to keep in mind if you are a first-time investor.
1) Know your financial standing
Many people invest with the hope of making huge profits, but totally disregard the risks involved. A rule of thumb would be to only invest with what you can afford to lose.
The worst thing that can happen to an investor is to end up with huge losses, which can turn life into turmoil. Hence, it is wise to clear off all bad debts and keep a rainy day fund of at least three to six months’ worth of expenses.
2) Understand the various investment options
You should develop a clear understanding of at least a few of the many investment options available to you. These include blue-chip stocks, forex trading, and REITs, to name just a few.
In general, blue-chip stocks are usually large, well-established and financially-sound companies that have been in operation a long time. Forex trading belongs in the ‘more risky’ camp while REITs are just the opposite, providing stable yields every year as long as they can find tenants for their properties.
As the saying goes: “No one size fits all”. Thus, it is important to know your own risk profile and carry out thorough research even before you step into the game.
3) Find a mentor
During my early years of investing, I wasted a lot of time learning from my newbie mistakes – trading in and out without a plan, fixating on the stock prices and listening to hot tips from forums.
In hindsight, it would have been so much easier and economical had I looked for a more experienced mentor at the start. It isn’t easy being a first-time investor, as it is akin to stepping into a whole new world where you have to learn everything from scratch again.
Remember – even the world’s greatest investor Warren Buffett had a mentor before him called Benjamin Graham.
4) Know when to exit
Last but not least, many first-time investors can now easily find out what stocks to buy due to the easy access of analyst reports these days.
That said, many of them do not have an exit strategy in place. Ask yourself this question before you even buy stock next time: “Under what circumstances will I sell this stock?”
Is it when the stock price drops by 10 per cent, or when the stock becomes over-valued? Or, how about when you find another more lucrative stock and want to liquidate the current one to invest in the latter?
Answering these questions can help you plan in advance on how and when to sell your stocks, so that you do not panic when the real circumstances surface.
James Yeo is a finance professional in the Asset Management industry for more than 6 years. He also founded an investment blog at www.smallcapasia.com which is dedicated to helping retail investors find winning stocks.
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