5 Important Things to Remember When Investing In Stocks

Investing in stocks is a great way to build future wealth. However, before you start investing, you want to have a strategy to achieve your goals. Today, we discuss the five important things to remember when investing in stocks. Make sure you have these items checked off your list to help you limit the mistakes of many first-time investors.

1. Start with a plan

Plans are essential when it comes to you accomplishing your goals. This is your strategy or roadmap of what you want to accomplish.?We plan every aspect of our lives.?If you want to take a trip, you create a traveling plan. While you may not need to do more than simply put the address in Google Maps, it doesn’t mean a plan wasn’t created. Google created the traveling plan, but you still have to determine the amount of money you need for gas and whether you need to make hotel reservations.

If you wanted to be heathier, you need a health plan. Your health plan would include the foods you eat and the exercises you perform. Playing baseball as a kid, we always had a plan of attack. The plan would include the signs for the game, the tendency of the pitchers, and the positions/batting order of the starters. There is so much strategy in sports and you can clearly see who was better prepared for the game.?Investing is no different.?The person with the better plan and strategy tend to perform the best.

2. Learn about yourself

When you are working with a fiduciary advisor, they are going to make sure your plan is specific to your appetite for risk.?Everyone cannot deal with the ups and downs of the markets.?Investing in a stock that has significant growth potential, may also have significant loss potential. If you find yourself unable to navigate the loses in the downturn, you will sell your stocks and lock in your losses. It would be better for someone who cannot stomach the losses to invest in a safer investment with lower volatility.?That way you can sleep better at night while protecting yourself from emotional decisions that will hurt your returns.?It is critical you have a financial plan that considers your emotional and financial wellbeing.

3. Diversification is still king

You want to have 10 to 15 stocks in your investment plan. If you are not interested in choosing individual stocks, you can choose a mutual fund that is already diversified. In addition to making sure you are diversified with multiple stocks, make sure you are diversified by industry as well. You don’t want all of your stocks in the tech or any one industry, because if one industry takes a hit, your entire portfolio could suffer.

This happened recently between Uber and Lyft. Uber met expectations and had favorable earnings report a week before Lyft gave their earnings report.?Lyft did not have a favorable earnings report.?They hit earnings, but there was concern about driver incentives. The issues Lyft faced caused people to question the strength of Uber. As a result, Uber stocks dropped with Lyft stocks even though Uber had a favorable earnings report. People felt it was inevitable Uber would face similar problems to Lyft since they were in the same industry.

A note on purchasing company stocks

For some of you, this includes the option to purchase company stocks at a discount. While it is great you believe in the company you work at, you don’t want too many of your shares in one company (even if it is at a discount). Now, some of you work at companies that make it difficult to purchase stocks in the market. You have restrictions on purchasing from competitors and other rules that can be a bother to navigate.

It is still worth your time to figure out how to navigate the rules of your employer if you are going to select the stocks yourself.?You don’t want to invest in what’s easiest; you want to invest in what makes sense. Take the extra time to read your company rules on investing so you can create a plan that allows you to invest in the company’s that help you achieve your financial goals.

4. Get your financial house in order

It is about more than the stock market when it comes to important things to remember when investing. You want to make sure you have taken care of your debt before you start allocating money towards your investments. Consider the average credit card has a +20% interest rate. This means for you to make money; you need your investments to return a profit greater than 20%. That is why it usually makes more sense to pay off your debt beforehand.

Next, you want to build an emergency fund. It can be tough to leave your money out of the market, but you risk going back into debt if a problem arises.?If you don’t have any money set aside, you will be forced to fund your emergency with a credit card.??Most people try to have 6 months of funds set aside for their emergency fund. However, there are some with 3 months saved and others with 12 months saved. How much you decide to set aside depends on a lot on your personal comfort zone and needs.

5. When should you buy and sell

Many find using dollar-cost averaging approach works best for them. Dollar cost averaging is you will invest amount of money in the stock market every month. You will end up purchasing the stock at a lower average price some months and a higher average price other months. This tends to work better for most people than the alternative of purchasing a bunch of stocks in one lump sum. The risk of purchasing the stocks all at once is the possibility of the stock price lowering over the next few weeks and months. There are times purchasing in one lump sum will work best, but the important thing to remember when investing is it’s hard to time the market.

Rebalance your portfolio

You also want to determine when you should?rebalance your portfolio.?Over the course of your investment career, you will find yourself facing the choice of when to sell your stock.?If you have one stock that is gangbusters and keeps going up, while the other stocks keeps going down – you want to consider rebalancing. For example, let’s say you want your portfolio to be 60% growth stocks, 30% long term debt and 10% real estate. Real estate is having an amazing year and it has grown to the point that it now makes up 20% of your portfolio. Conversely, your growth stocks are not having the best year and they have lowered to make up 50% of your portfolio. Even though you are investing the same amount each month, the stocks performance changes your portfolios makeup.

If you decided to rebalance your portfolio once a year, then you would sell 10% of your real estate holdings to bring your portfolio back to 10% (20% minus 10% sold) real estate. You would then take those profits and purchase 10% of additional equity shares (50% plus 10%). This brings your portfolio back into your initial balance of 60% growth stocks and 10% real estate.?The benefit of this approach is it forces you to buy high and sell low.

Don’t be like most people

Which is the opposite of what most people do. Most people will sell their equity stocks as they lose money and buy real estate stocks as they keep rising.?Unfortunately, this is the opposite of what you really want to do.?You have locked in your losses by selling your equity stocks and you then purchased real estate stocks at all-time highs. As you already know, this strategy does not work long-term. You want to have a plan in place that is going to help you make the most intelligent investment decisions.

6. Bonus: Don’t forget the free money

As a bonus, you want to always take the free money. If your employer has a 401(K) match, you should contribute up to the match. This is free money!

Final thoughts

When it comes to important things to remember when investing, follow the strategies we discussed today. Make sure you have a plan in place that is specific to your needs and risk appetite. Know when you are going to buy and sell your stocks. Keep in mind you want to keep your investments diversified. Even if you love a stock, you need to mitigate some of the investment risks. And don’t focus solely on your investments.?It may be an afterthought at times, but you want all your finances in order.?Follow these principles and you will set yourself up for success.