Make better investing decisions in the new year, and you'll prosper for years to come.
Now that a new year is underway, it's time for you to figure out how you can improve your finances going forward. Investing, through calculated risks, is part of a comprehensive and successful financial plan. As you consider your investing plan for 2012, here are three things to try:
1. Learn Your Risk Tolerance
The first thing you need to do is figure out your risk tolerance. Your risk tolerance is an important part of investing success. If you don't account for the amount of risk you can handle, it's easy to make poor investment decisions. Your risk tolerance consists of two parts:
- Financial: This is the risk you can afford, in money terms. Can you afford to lose the money you are investing? Because there is always that possibility. Figure out how much you can afford to lose. Don't invest more than you can afford to lose. Additionally, your financial risk tolerance should take into account whether or not you can handle having that money tied up. Don't invest so much that a lack of liquidity will hamper you in a financial emergency.
- Emotional: Even if you can afford to lose the money invest, are you emotionally able to deal with it? Understand your emotional reaction to the markets. Will you obsess over every down day? Will you check obsessively? Will your concern about the markets strain your relationships? Or are you exuberant? Those with a high emotional risk tolerance might take excessive risks with their finances. If you have a high risk tolerance, be aware of it — and take steps to curb your enthusiasm before it gets you in trouble.
Analyze your risk tolerance, and identify your pressure points when it comes to investing. Once you understand yourself better, you will be able to build your investment portfolio in a way that better benefits you, and helps you take on an acceptable level of risk to help you reach your goals, whether you invest in funds, individual equities, real estate, bonds, commodities or currencies.
2. Create a Purpose for Your Money
Why are you investing, anyway? It's important to understand your motivations, since different goals require a different approach — especially if your timeframe for some goals is shorter (or longer) than the timeframe for other goals. You might send your child to college with the money from one investment portfolio before you end up retiring. This means that you will need to take different approaches to your investment accounts or portfolios.
Carefully think about what you want to accomplish with your money. Do you want an investment portfolio that creates income? If so, you might want to consider including dividend stocks. Are you hoping to amass $1 million before you retire? Your investment strategy for the long haul had better reflect that. Think about what you want your money to accomplish, and be realistic about how investing can help you with that. Once you understand your own motives, you will be able to make better investing decisions.
And remember: You don't need just one purpose for your money. You can have multiple goals. Your investment portfolio will have to be structured to reflect your different goals and timeframes, though.
3. Know What You are Investing In
Warren Buffett famously advised investors not to put their money in investments they don't understand. Before you invest in something, make sure you understand how it works. Starting out with stocks and bonds, as well as funds, makes sense because these types of investments are fairly easy to understand. You can learn what is likely to help them increase in value, as well as how they are bought and sold.
If you don't understand something in portfolio, maybe get out and replace it with something you do understand. You don't have to be an expert, but you should have a general idea of how it works, the factors that influence price, and the fundamentals of the investment.
Investing can be a great way to grow your wealth. But it's something you should think about. Consider what you hope to accomplish with your gains, and figure out your own investment style. You need to know what works for you, since the same portfolio and asset allocation isn't right for everyone. Take the time to get to know yourself and your investments, and your portfolio will benefit.
Image source: Fletcher6 via Wikimedia Commons