Start with the basics, and the rest falls into place
Q – I am a self-directed investor and mainly trade stocks through an online brokerage service. Do you have any tips for a novice on how to set up a plan to become a successful investor? – Asked by Terri W., Fort Erie, Ontario
Even before you start researching stocks as potential investments, you have to start with the basics. First, remember that there is no free lunch. If you are serious about investing, then you will need to start from ground zero and build from there.
First rule: Live within your means and do not spend more than you earn. You do not need to make a six-figure salary to become a successful investor, but you do need to set out a diligent savings goal and investment plan that will span decades.
Second rule: Understand the power of compounding. This is the principle that any earnings from an asset will in turn generate their own earnings. Compounding allows your original investment amount to grow faster when earnings are reinvested than when earnings are paid out. Most people will have heard about “compound interest,” which is simply the principle of compounding applied to interest-bearing assets, like Guaranteed Investment Certificates, where the interest earns interest.
Third rule: Start early. The more years you have to invest, the more manageable your plan becomes.
Fourth rule: Always pay high interest debt off (like credit cards) first before investing. If your credit card charges you 19% in interest and your expected market return is 7% to 9%, it only makes sense to pay the higher rate off first.
Fifth rule: Be flexible. Your life will change and evolve, and your savings and investment plan must grow with you.
Once you understand the rules, the rest falls into place. Create an investment plan that matches your risk-tolerance level. For example, it makes absolutely no sense to say you’re a conservative investor and then jump into trading penny mines on the TSX Venture Exchange (and I’ve seen plenty of novice investors fall into that trap). Once you’ve set your investment plan in motion, track it weekly or monthly. You’ll be surprised how fast your investable assets can grow when you take control.
Finally, if you’re uncertain about how to proceed, don’t jump in without fully understanding what you are doing. Many novice investors will do just this, acting on something they heard from a friend or relative, or at the office, or even worse, over Twitter. This is the surest road to financial failure. If in doubt about where to go next, consult an independent financial planner, who will work with you every step of the way to create an investment plan that you understand and that will meet your financial goals.
© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.