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Learn How To InvestThe untold secret of how to invest successfully is that what you know intellectually about: 
... isn’t worth a hill of beans when compared with your ability and willingness to respond rationally to the ever-changing perception of the market. How you react (your personal behavior) to the behavior of the market as a whole will determine the degree of success you have in the world of investing. More than likely, you know that you have to accept some risk when learning how to invest. But what may not be as evident is that even the riskiest investment can be controlled. Let’s use the technology crash (2000-2002) for example. Investors were mesmerized by the extraordinary increase in stock prices from 1998 to early 2000. Everything techie seemed to make money. The problem was that defensive action wasn't part of their strategy. Was this due to lack of awareness? Hypnotic spell? Greed? Wishful thinking? It doesn't matter. People who thought they knew how to invest just sat and stared as the value of their stocks soared skyward. And, they kept sitting there even when the markets reversed course and plummeted into a dark hole. Fortunes were made ... and abruptly lost ... because people who had yet to master the basics of how to invest believed foolishly that the downward spiral would stop. But, it didn't! While 2003 showed some improvement, it was too weak. And, both 2004 and 2005 were uneventful. So... was it wrong to invest in technology stocks? Of course not. But, it was wrong to commit money without first understanding how to invest using a predetermined course of action to protect your profits and limit your losses.
For instance, if a share price goes from $10 to $20, you should commit to sell if the price slides back to $15. In other words, if the price gives back 25% of its gain... then it’s time to sell. No exceptions! In this example, you would make 50 percent instead of 100 percent. This assumes, of course, you would have sold when the price grew 100 percent. The fact is most investors would not do this. Instead, they would get a little greedy because most people want more... rather than settle for a reasonable profit. This may be considered human nature... but it usually leads to unnecessary losses. Another strategy for those learning how to invest is to sell enough to recover your initial capital and let the balance of your principal continue to respond to the ups and downs of the marketplace. For example, if the price goes from $10 to $20, then sell one-half of your holdings at the $20 level. This way you recover your initial cost. The balance of your risk exposure becomes self-funded. Stop-loss techniques will:
So, why don’t more people use them? Because investor behavior is seldom ... if ever ... rational. Learning how to invest during most of the 1980s and 1990s, was deceptively easy. Stock and bond prices always seemed to bounce back from market slumps. Market corrections appeared predictable... so all one had to do was just hang in there. But, not any more. Don’t misunderstand. Market cycles continue to be somewhat predictable. But the possibility of a large scale recovery of specific asset groups has become much more challenging. How to invest today demands a behavior most investors are incapable of exhibiting... and that is to pay more attention to what is in your investment portfolio.
Successful investing is premised on several ironclad principles. One such principle is diversity. But, diversity does not mean just owning several stocks. Intelligent diversification means to allocate among asset classes in a balanced model that fits your behavior pattern. There are numerous asset classes to include:
Your objective should dictate your allocation of assets. Are you young and looking for maximum growth? Or, are you older and more interested in income with preservation of capital? Do you understand how to invest during market slumps? Would you tolerate them, or would you toss and turn and lose sleep worrying about market volatility? Are you willing to take an active role while learning how to invest? Or, would you rather pay someone else to do this for you?
So, the question becomes how to invest using an asset allocation that is simple and effective. Here is a time-proven strategy:
Once you're comfortable with the allocation within your account, you must pay attention ... no less than annually ... to make certain the model continues to be balanced. It's one thing to intentionally change the percentage of allocation. But, it's quite another if percentages become skewed due to market performance. The primary purpose of the allocation is to protect you from the extreme movement of any one particular asset. If extreme movements do disturb the percentage of your allocation, then it's up to you to rearrange everything back into line. Let's use an example of how to invest using this concept. Gold and silver are two metals that have recently made sharp moves in the commodity market resulting in extreme highs and violent corrections. As this happens... your 5 percent allocation to these commodities will change dramatically. The model integrity of how to invest demands that you sell some of the gold and silver positions and either pocket your profit or purchase more of another asset class already in your portfolio.
Before wrapping this up, I'd like to give you the opportunity to have an amazing book on how to get rich. Now, I know what you're probably thinking... "yeah right"! Well, don't sell this short because it's been around for almost 100 years and hundreds of thousands of people have benefited by applying its principles. The choice of words may seem a little strange, but the message is absolutely right on the money (no pun intended).
Knowing how to invest successfully requires:
Don't act hastily or indiscriminately because you hear about a hot tip or think a particular stock is going to skyrocket. Maintain discipline... and keep this in mind: There is enough wealth for everybody. So, take your time. Plan a course of action that focuses on the above ingredients.
To help you get started, here's a comprehensive
guide on how to invest.
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