Becoming a safer investor isn’t rocket science. It also won’t require years of market experience and countless online courses. I’ve rounded up some helpful pointers that will not only make you a safer investor but are what I use on a daily basis when interacting with the markets.
1. Don’t blindly follow the news
The news cycle is designed to cause emotion. That’s the whole point around headlines like “MARKET CRASH 2020: WHY STOCKS ARE FALLING FAST!” Such headlines sell newspapers, online subscriptions, and attract attention on social media. My advice is to largely ignore them. As the British say: keep calm and carry on.
Stocks will go down as well as up. You will lose money as well as gain some. Just remember this: you won’t technically make a loss so long as you don’t sell. Even more established, well-positioned companies will fall in value during hard times. So long as you invest in good, solid companies, you will have a better chance of recovering losses and making a profit, so long as you don’t sell.
2. Dollar-cost Average
You’re going to grow tired of me repeating this same phrase, but you must learn to dollar-cost average. This method ensures you’re not going to enter the pit of despair, gazing at underperforming stocks, and instead resist selling altogether. Dollar-cost averaging (or DCA for short) is when you continue purchasing stocks as they rise and fall.
By doing so, you average out your overall cost per share, which can then help when the stock eventually performs well. Instead of selling a stock should it fall 10%, simply buy more if you believe it’ll end up recovering — or better yet, improve far beyond your original purchase price. This’ll provide additional gains in the long run and allow you to add more shares for increased dividend output. A win-win.
If you’re new to investing and want to learn more about DCA and other terms, I’ve got a handy resource right here to help you learn to invest.
3. Research companies you want to own
Do you really believe in the companies you hold shares with? Would you feel comfortable using the service or buying a product from said companies? If not, why would you want to invest in them? I choose companies primarily on whether I believe in their products/services and how management runs the show.
Once I’ve shortlisted all the companies I like, I then take the time to research each one before investing. They have to meet some strict criteria before I part with my cash. You need to do the same too, especially in such volatile markets where the next recession could be just around the corner. If you wouldn’t feel confident in holding the stock through turmoil, don’t buy it.
4. Diversify your stock portfolio
I know this goes against Warren Buffet, but I believe in a diversified portfolio for most investors. Especially when it comes to dividends, this is incredibly important. The goal with financial independence and retire early (FIRE) and dividend investing is the long-term passive income. Any company could reduce its dividend payouts. Remember: Dividends are not owed to investors.
By having a diversified portfolio, not only do you protect yourself from potential losses should some markets fall, but you’ll have a more reliable stream of income. The chance of one company scrapping its dividend is low, but 20 or 30 companies scrapping dividends? Diversification does not equate to increased gains, however. In fact, it’s quite the opposite. Should that one company be outperforming the rest of your portfolio, the effect won’t be as great as if you were all-in with that stock.
My free dividend tracker will help you track your portfolio and showcase just how diverse it is.
5. Buy and hold
Following up on tip #1 is to buy and hold. Say it with me. “Buy. And. Hold.” Selling stocks in a downturn is a bad idea unless you’re absolutely sure that the company is going to go bankrupt. Riding out the storm is the best way to enjoy long-term benefits. So long as you don’t sell shares, you’ll not incur any of the unrealized losses.
2020 was a wild year, which saw my portfolio collapse by almost 8% across the board. That wasn’t as bad as the drops other investors experienced, but it was certainly an eye-opener. It’s still the case that many new investors see a drop and immediately consider selling to cut a loss. But if you never sell and the company is a decent pick, there’s a good chance it’ll recover. And if it provides dividends, you’ll still earn a little in the process.
6. Focus on a goal
Try and have a goal in mind when you invest. What do you want your money to help you to achieve? We only get to live in this world once so it’s important you live a successful life for yourself. Do you want to retire by the age of 50? Want to retire in a sun-blessed region with a vineyard of your own? These are some goals to bear in mind to help motivate you to save and invest.
Even short-term goals are well worth considering, like buying your dream car or entering into a mortgage with property. Without a goal in mind, there’s no path for you to take with your money.
7. Clear any liabilities
Having a mortgage, car loan, loans, being in arranged overdrafts, and more isn’t a good match for investing. Saving money is incredibly important for being a safe, successful investor. While a long-term mortgage isn’t going to hamper your investing as much as other credit, it’s still worth bearing in mind to keep it as low as possible.
What is dividend investing?
What is dividend investing all about? It’s a strategy that focuses on building a portfolio of stock holdings that pay shareholders on a regular basis. It’s the perfect way to make your money work for you and retire early.