Learning to manage your money and build an investment portfolio can be a difficult task for many new investors. For some people, it’s simply a matter of not having enough time to pay proper attention to the way their wealth is invested and the risks to which they’re exposing their hard-earned savings. For others, it comes down to a lack of interest in investing, finance, and money management. These folks might be smart, hardworking and even brilliant in other areas of life, but they prefer to do anything else rather than talk about numbers and figures.
Here are some tips to become a better investor if you’re new in the field:
Avoid Investing in Anything You Don’t Understand
People seem to forget this basic truth if they aren’t being reminded of it.
- You don’t have to invest in any one specific investment. Don’t let anyone convince you otherwise.
- Plenty of opportunities will come along in life. Don’t let fear of missing out cause you to do foolish things.
- If you or the person managing your money can’t describe the underlying thesis of an investment — where and how the cash is generated, how much you’re paying for that stream of cash, and how that cash will ultimately find its way back into your pocket — then you aren’t investing.
Understand That Market Value and Intrinsic Value Are Different
- If you were able to pull up quoted market values on your real estate investment, you’d be down in a very significant way on paper. It would be brutal.
- For long-term investors, this is not particularly meaningful because true investors – in the words of Benjamin Graham, the legendary father of value investing – are rarely forced to sell their assets.
- You should know the intrinsic value of your property and be able to defend its calculation using conservatively-estimated, basic math. Think of the market price as something you can take advantage of if you so choose.
Learn to Think in Terms of Net Present Value
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Pay Attention to Taxes, Costs and Terms
- Small things matter, particularly over time due to the forces of compounding. There are all sorts of strategies you can use to keep more of your hard-earned money in your pocket, including things like “asset placement”.
- Think of a fixed-income investor holding tax-free municipal bonds in taxable brokerage accounts and corporate bonds in tax shelters.
- Make sure you’re weighing the value of what you’re receiving against the costs. A lot of inexperienced investors focus on things like expense ratios and management costs to the exclusion of everything else. They ultimately cost themselves far more in things like dumb tax mistakes or painful risk exposures that cause their accounts to implode.
Never Think About Performance Alone Without Factoring in Risk Exposure
- It’s a dangerous sign when investors start talking about their “great” returns without discussing how those returns were generated. The risk exposure to which you exposed your capital, measured not by volatility in market quotation but in the price paid relative to intrinsic value with an adjustment for the potential of wipeout, is the real secret of building wealth over the long term.
- Pay for your investments, in full and with cash.
- Only buy stocks or bonds that you’d be happy to own for the next five years if the stock market closed and you couldn’t get a quoted market valuation on it.
- Avoid securities issued in certain sectors, industries or lines of business, particularly if they are further down the capital structure.
