When people who have no degree in finance or little experience in investing assume control of their finances, what are the key things they must do? And what are the risks to avoid?
Following are five tips for self-directed investors.
1. Develop a plan
Consistently investing a regular amount each month — $1,000, for example — in good times or bad, leads to savings that compound over time, Schatz says. Because they’re already diversified, investing in mutual funds and exchange-traded funds, or ETFs, minimizes risk compared with choosing individual stocks, which often fluctuate wildly in price.
Further diversifying among funds that represent different asset classes is critical to well-rounded investing and an important way to lessen risk. For instance, you might have a mix of large-cap and small-cap funds with growth and value styles, domestic and international funds, as well as bond funds.
2. Avoid Emotional Trading
Investing on emotion destroys returns. People buy high and sell low. Fear and greed undermine the goals of investors. When fear drove investors to abandon the equity markets during the financial crisis, they missed the opportunity to benefit when the markets eventually rebounded.
Establishing a plan is tricky, but maintaining it through perilous times is doubly difficult. The key to sustaining it is by being clear about what you are trying to accomplish, determining your risk tolerance and setting a time horizon
3. Research & Research & Research some more!
Many do-it-yourself investors see things from a limited viewpoint. They look to see how the stock market is performing and whether it’s up or down, but that doesn’t constitute sufficient research. Take your time. Do your due diligence. Talk to other more seasoned investors. Make sure that you have thoroughly looked at everything before you jump in. Keep in mind also that there is nothing more constant than change. So just because you are all in, that doesn’t mean you stop researching your options and what is out there. Keep informed!
4. Follow your designated plan
Devising a written plan that details one’s personal investment strategy keeps investors on track. That plan should include a description of how investments will be diversified and the percentage of the portfolio allocated to each one. Since over time the investments will dip or spike at different rates, make sure to re-balance the portfolio annually to conform to the original plan is an important step.
Developing written exit strategies enables self-directed investors to maintain the course. If an individual stock hits your target, it may be time to re-evaluate or sell it and find another growth stock.
5. Don’t fear seeking professional help
If you find yourself reacting to market fluctuations or making decisions based on the news, consider hiring a financial planner to review your plan, offer feedback and make suggestions. Most financial advisers have honed their strategy, learned what works and what doesn’t work, and know how to establish a well-thought-out investment plan. Don’t think you have to relinquish control of your assets or your portfolio. Having an advisor in your pocket is a great investor move, so do your due diligence and find the best.