So, you've made a little money and now you're thinking of investing it for the future. Very sensible, but as a first-timer you're probably wondering where to start.
Investment channels are many and varied, ranging from a standard savings account at your local bank to some more obscure alternative vehicles. Expert strategies in this area are often just as confusing, filled with jargon.
But the basic rules of investing are actually pretty simple; by failing to observe these you could easily find yourself falling into common newbie traps. Here are five of be wary of...
There's something intensely scary about putting your hard-earned money on the line, especially when you're able to see the real-time performance of whatever it is you've invested in.
Backing businesses on the stock market, for example, demands an iron will. You should be prepared for downs as well as ups and your focus must be on long-term performance over day-to-day turbulence.
People who panic tend to lose, while those who keep a cool head often come out on top. That doesn't mean you should sit back while an investment bombs, but be prepared to lose a little here and there.
As celebrity investor and publisher Dennis Gartman once said:
"It is quite possible to make large sums trading/investing if we are right only 30% of the time, as long as our losses are small and our profits are large."
You've probably heard the phrase 'don't put all your eggs in one basket'; well nowhere is it truer than in the realm of personal finance. A great way to keep your blood pressure down is by sprinkling your money around in several investments, thereby limiting the damage if any one bet goes bad.
Even if something looks like a certainty, be cautious. George Soros, the billionaire who famously bet against the Bank of England and won, is credited with soothsayer-like powers of prediction. But even he admits the future is impossible to know:
"The idea that you can actually predict what's going to happen contradicts my way of looking at the market."
Falling for a fad
The smart money often gets out just as the trend is setting in. This is the case with fads. A fad is a business idea that grows quickly upon a sudden boom in interest, only to fade later on.
The dotcom boom was perhaps the largest fad of recent times; it saw billions thrown at companies in the digital space whether they had a viable product or not.
Arguably, a recent fad is Bitcoin. It captured the imagination of investors who inflated the digital currency out of all proportion, until a crash beginning on 16 December caused its value to slip nearly two-thirds.
It's possible to make plenty of money from a fad - lots of people made millions from Bitcoin - but the crucial element of timing makes it a risky prospect and beyond most people's appetite for danger.
As Warren Buffet, one of the world's richest men and god-like financial genius, puts it, you should be "fearful when others are greedy".
Research is a critical component of savvy investing. It will help you not only pick a winner but will also maximise your returns when you do. Understand what you're putting money into, as well as the best strategies for doing so, before you act.
Famed brain-box Benjamin Franklin once said:
"An investment in knowledge pays the best interest".
Luckily there's a wealth of information on all kinds of investments, while advisors are on hand to offer guidance. Take all of this on board and you'll be better equipped to make good decisions.
World-famous stock market investor Peter Lynch, has summed up why this is important:
“If you don't study any companies, you have the same chance of success buying stocks as you do in a poker game if you bet without looking at your cards."
Craving quick wins
Day-trading is a roller coaster ride with quick in and out decisions. It's strictly for professionals and full-timers. As a novice in the game you're better off looking for good quality investments that offer long-term returns.
Most investors consider potential performance as well as past performance; in most cases potential takes a while to show its face. So do your research, look for solid prospects and make your play.
Warren Buffet, famous for his long-term successes, sums up his approach:
"If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes".
Investing isn't rocket science, but it pays (literally) to understand the basics. The simple lesson here is that gaining knowledge, spreading risk, and playing the long game are all routes to financial success.
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