10 May Investment Lessons Learned from Successful Investors
Brian Herbert once said that “The capacity to learn is a gift, the ability to learn is a skill, and the willingness to learn is a choice.” We can learn from the likes of Warren Buffet, Jack Bogle of Vanguard, Philip Fisher, and Peter Lynch. By taking the time to review the investment lessons learned from some of the most successful investors in our time, is time well spent, so you don't repeat the mistakes they made along the way.
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Top 10 Investment Lessons Learned
Ignore the Crowd
Learn to think for yourself. Following the herd can lead you right over the edge of the cliff. Investment advice is everywhere. It’s on the news, you hear it from your pals, and even your local bartender. If all of these tips were accurate, we’d all be rich. Even the brokerage reports should be taken with a grain of salt. According to Buffet, the reports are more like a promotional ad, than an investment guide. Buffet says that the number of buy recommendations far outweigh sell recommendations. No surprise, since the buy recommendations generate business for the brokerage house. Ignore the financial mob.
Saying No! One of the Best Investment Lessons
Sometimes saying no to a hot tip can be the best investment you ever make. There was a boom in condo construction along the gulf coast of Florida and Alabama in the early 2000s. The average cost of condos in that area rose to over $530,000 in 2006. Just four years later, the same condos were selling for $258,000. Investing in real estate can be a high-risk proposition. Especially if you have no expertise in the local real estate market. The risk is further accentuated when investing in condominiums. The smart investor who passed on the gulf coast in 2006 has an additional $250k in his portfolio.
Keep Your Emotions in Check
Investing in the stock market is a knowledge-based strategy game, it's not a love affair with a particular stock, industry, or company. Save your emotions for your spouse or significant other.
If a stock is performing well, you may become attached to it. But falling in love with a particular investment can be risky. You like the stock because it has performed well to date. But you may have no idea how it will perform going forward. Stocks don’t rise indefinitely. Take your profit while you can.
Avoid Overpaying Taxes
Learn the tax laws, or if you can afford it, hire a tax specialist. Tax experts can provide advice on how to avoid paying high tax rates on short term gains. It’s likely that you can strategically use short-term losses to offset the gains and avoid overpaying taxes.
Invest in a Business of Personal Interest
One reason Warren Buffet is so successful is that he enjoys spending the majority of his time reading quarterly reports. If this sounds like a tedious task to you, you’re likely to fail. Understanding the financial plan of a company you invest in is an essential step. To make this otherwise monotonous task more exciting, invest in an industry you have an interest in. You will be more likely to stay informed of the market trends and make intelligent investment decisions.
Preserve Your Capital
Avoid the urge to stay in too long. You may be of the mindset of keeping a stock until you have milked every last dollar in potential gain. Doing so may increase the risk of a substantial loss. Keep focused on loss avoidance. In doing so, you will tend to select stocks with greater upside potential. More importantly, you will develop a tendency to avoid stocks with too much downside risk.
There are a number of newbie mistakes that you can easily avoid, check out our article on Common Investing Errors Newbies Make and How to Avoid Them.
Diversify: One of the Top Investment Lessons
As you begin to build your portfolio, you should have a diversification plan. Having a good mix of US Stocks, Foreign Stocks, Bonds, and Short-Term investments can reduce your risk. The perfect blend can depend on many factors, most importantly, your age, or the number of years until retirement. For example, a conservative mix, when nearing retirement, may include 50% bonds, 30% short-term investments, and 20% in stocks. A more aggressive growth plan may look more like 60% US Stock, 25% Foreign Stock, and 15% in bonds.
Time is on Your Side
Of all the investment lessons learned from the experts, starting early ranks among the top concepts. If you start investing early, time will be on your side. For instance, let’s say your portfolio was worth just $100,000 at age 30. With a modest return of only 5%, by age 37, your portfolio would be worth upwards of $200,000. At age 54, the same portfolio would be valued well over $400,000. If you continued to add to your portfolio along the way, it would be well into the 7 figures. Start investing early and enjoy an early retirement.
The most important lesson to take away from this post is to always keep learning. Be curious, do your research, and investigate your options. This is your future, the more you learn and the wiser choices you will (hopefully) make.