The Five Habits of Successful Private Investors
There is no reason why anyone shouldn’t become a private investor. There are plenty of people doing it, from massive organisations to private individuals.
For those thinking of dipping a toe in the unfamiliar waters of investing, here are five habits of successful investors that will help you float rather than sink.
Be clear about your goals
You must know why you are investing.
Are you building a nest egg for retirement? Making money so that you can help your children establish a foothold on the property ladder?
Perhaps you’re trying to pay off your mortgage so that you can live debt free? Are you looking to earn enough income to give up your day job?
Of course you may have other ideas. Or you could be thinking about all the above, but at different stages in your life, sometimes overlapping.
Whatever the reason, it’s important to be specific about your goals, allocating financial targets and time limits.
“I want to pay off my mortgage in 10 years time instead of 25” is a clear, specific goal.
With clear goals in place you can pick out the investments that will lead you towards them.
Think strategically
With your goals in place, devise strategies to deliver them. Before making a particular investment, ask yourself if it fits with your strategy. Decide on the types of investments and the markets you will focus on.
For example, if you have a strategy that depends on property investments, long and medium terms, don’t invest in, say, pork bellies, purely because you come across a hot tip.
If you lose focus your investments will be all over the place, difficult to track and likely to fail.
Making incremental investments in prospects where you are seeing consistent growth is the best route to long-term growth.
Diversification
Having said that, within your strategy you must allow for diversification, because putting all your eggs in one basket is just too risky.
Many people divide their investment funds into three groups, each one with a different level of risk – a third for investments with low risks and steady returns and another third for high-risk, high- gain investments. The third portion fits in the middle – medium-risk for medium gain.
For example, if you’re focusing on shares in UK-based organisations, you can invest in well-known companies in the FTSE 100 andsome FTSE 250 companies.
Then the high-risk, high-gain third can be placed with AIM companies or even be used to invest directly, using crowdfunding websites or peer-to-peer business loan websites.
This allows you to take advantage of high-risk investments, without risking your whole portfolio should those high-risk investments fail to deliver.
Some people divide their funds into fifths rather than thirds but the principle is the same.
People will also shift the proportions as they get older, so that by retirement age the bulk is in safer investments.
Be prepared to walk away
The key to taking a loss well is to walk away when the time is right. Try not to think about lost gains because they are only gains on paper – they’re not real unless you cash out.
Set a sell limit for each investment and if it hits that limit, you sell, whatever you think might happen tomorrow.
The reason for having strategies and diversifying your portfolio is to minimise risk. On the whole, if you stick to a plan and increase your holdings in investments that are successful, the losses will easily be countered by the gains.
Losses are never personal, although they feel that way, which leads us to our final point.
Take the emotion out of investing
It’s easy to say and hard to do, but logic must drive your investment decisions, not emotion.
The classic example is that people tend to invest more when the stock market is high, riding on the crest of a wave, and sell when the market goes down as they get worried.
Logic tells you that the right thing to do is the complete opposite – buy when stock is in the doldrums and sell on when it’s on the up.
It’s fine to allow emotion to dictate your target markets and types of investments, just not your buying and selling decisions.
If you’re interested in the environment, for example, you might decide to invest in renewable energy funds or organisations.
If you invest in something you’re interested in, you are more likely to keep an eye on it.
Try not to watch too closely and get hung up on daily shifts in prices though – it’s the longer term you’re interested in, but short- term losses may make you panic.
Don’t get emotionally attached to investments either – sell your turkeys, and don’t be afraid to admit that you made a mistake.
Join in
There are plenty of sources for help and information about being a private investor – on the web, books and podcasts.
Get as much advice as you think you can handle and start building your portfolio as soon as you are ready.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
