Investing in the stock market is one thing. Being a smart investor who uses the stock market to build wealth is an entirely different thing.
There are so many resources out there all vying for your attention. You’ve got Wall Street brokers, financial planners, mutual fund companies, and financial magazines all giving you advice. Investing can seem complicated or risky because of the messaging confusion. Who should you listen to? How do you avoid the hype and invest in a smart way?
4 Tips to Being a Smart Stock Market Investor
Here are four tips you can use to avoid the hype and make better investing decisions.
One of the best things you can do as a stock market investor is to remove your emotions from any investment related decisions you make.
Your emotions can wreak havoc on you. Fight or flight encourages you to sell when a stock goes down. Greed tells you to buy more shares when the stock just hit an all time high. In both situations doing the opposite (if doing something at all) is likely the better alternative.
You should be buying low and selling high, but your emotions trick you to instead sell low and buy high. Removing your emotions, taking a deep breath, or deciding not to do anything until you have calmed down is one of the best tips when it comes to investing in the stock market.
Have a Plan
Successful people of all types, for the most part, have a plan. Very few successful people reach success by the seat of their pants. This is especially important when the market is experiencing a lot of volatility. Instead they have carefully considered various paths, put together a plan that they believe is best, and stuck with it.
The same is true of successful investors. Having an investment plan can help you avoid terrible mistakes because your emotions are in charge.
If you instead turn to the plan, it should tell you what to do. That means taking into consideration long term plans, the best path to reach those goals, and what to do in difficult situations where you feel like you have to do something. Detailing out your asset allocation strategy, when you will rebalance, and how large of a percentage you can dedicate to “fun” investments can save your skin.
Of course just taking an afternoon to put together an investment plan won’t help you. Your plan has to be useable; don’t make it so complicated that you are inclined to stick it in the filing cabinet never to be seen again. You have to rely on it to make investing decisions for it to be effective in helping you.
Turn Off Financial Media
You don’t need CNBC or any other financial media. The talking heads are there to keep your attention and get you emotionally involved. Remember, your emotions are likely to steer you wrong. Talking heads are all about eyeballs watching them to drive advertising dollars, so everything is the worst or best thing to happen to a stock in the history of stocks.
There are much more profitable things you can be doing with your time than looking at a stock ticker go by or looking at yet another chart.
Plus, the talking heads don’t exactly have a great track record. Take Jim Cramer for example. His Mad Money show is quite popular, loud, and has all kinds of crazy noises and graphics. Yet an analysis of his stock picks from July 28, 2005 to December 31, 2008 showed that his picks performed no differently than the rest of the market; it is pure entertainment.
Don’t Buy the Trading Hype
Most of the Wall Street firms make money by getting investors to trade as frequently as possible. Brokers market their trading tools, high tech charts, and all other kinds of tools to get you to trade and trade often.
What they are neglecting to tell you is that if you don’t trade frequently they don’t make money. The more you trade, the more money they make. Whether it is the trade commission you pay to buy and sell or the spread between the bid and ask of an investment, they need trade volumes to go up.
This is in direct contrast to what actually will make you wealthy. A consistent plan that buys investments and holds them for long periods of time isn’t profitable for brokers, but it will be for you.