How to Be a Smarter Investor in 7 Easy Ways

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how to become a smart investorFollow the time-tested path to become a smarter investor.

Most people are torn between the possible risk and return of investing in the financial market. While they want to get as much return as they possibly can from their investments, they are also afraid to venture beyond the basic savings account they know so well for one reason or another. To achieve your financial goals without getting burned in the process, here are some time-tested advice that can help you become a smarter investor.

Deal with the basics. Understand the difference between saving and investing, and get your financial house in order before you start investing your money. Saving is ideal for smaller, short-term goals while investing is for larger, long-term goals. Saving entails no risk of losing your principal while investing carries a considerable risk that you will lose money or not earn as much as you have previously expected. However, when done right, investing your money may bring a significantly higher rate of return as compared to saving.

Clarify your goals. Invest with a clear end in mind. Have a realistic goal and set how much you want to accumulate within a reasonable target date. Having a clear goal also helps you make a more informed decision and keep you from taking unnecessary risks.

Keep on learning. Educate yourself about the different types of investments, and focus on the potential returns and risks of each investment.

Don’t bet too heavily on any individual stock. Don’t load up your 401(k) with company stocks, especially if it is your employer’s stock. If you do this, you are putting your job and your retirement security in the hands of a single company. What happens if it goes bankrupt? To be safe, limit company stocks to 10% to 20% of the account’s value.

Diversify but don’t overdo it.
Spreading your investment over several investment classes can help you improve your portfolio while reducing risk. However, you should resist the temptation of loading your portfolio with every new investment that comes your way since it may do more harm than good. There is really no magic number when it comes to the number of investments that you should own but experts believe that if you have more than five or six, then you probably have more than you need.

Don’t sit on the sidelines
. Don’t let your nerves keep you away from the investment market. Stay in the market through its bottom so you can benefit from the rebounding market’s gains. According to the data gathered by SEI Investments, investors who missed the first week of recovery only managed to gain 24.3% while those who waited three months before getting back in gained only 14.8%.

Monitor and revise. Go over your investment plan at least once a year to make sure you are adhering with the guidelines in your investment policy statement. This can also help you cull out underperforming assets, rebalance your portfolio, or make the necessary changes that can help you accommodate your present circumstances.