If you want to improve your investing habits, you must do
the following tricks. They work like magic.
Connect your Investments to your Goals
It’s quite tempting to think that there’s a secret formula
which you can use to invest your money and ensure success. Even though some
strategies are better than the others, there’s actually no universal solution.
If you want to find the best investment strategy for your
situation, you must evaluate your investments in conjunction with your
investment goals. You can start by asking yourself the reason you’re investing and
what you really want to achieve.
The goals you set will help you determine the right asset
allocation, time horizon, and risk tolerance. Thus, analyzing what you want to
achieve helps you understand critical factors that determine where and how to
invest.
Reassess your Plans and Goals Regularly
Meanwhile, you have to remember that things change. And when
things change, you will sometimes find that you need to update your investment
strategy to reflect that.
This doesn’t mean you need to alter your investments every
month. What you do need is to take time and review your plan each year and ask
yourself if your investments still align with your goals.
On the other hand, remember that reviewing your investments doesn’t
always mean you should make some changes. There are times when the best move is
to make no move at all.
Risk Tolerance and Risk Capacity
Your risk tolerance is the amount of volatility you can
handle in your investments. If you have high risk tolerance, you can accept big
swings in your portfolio. You can probably
live comfortably with unrealized losses and confident in your ability to ride
out market downturns without losing some sleep.
Regardless of your risk tolerance, however, it’s not the same
as your risk capacity. While risk tolerance is pretty subjective, the risk
capacity is objective. Risk capacity refers to the amount of risk you can
actually take with your investments. You can determine this by how much you need
to meet your goals.
Diversify Portfolio and Accounts
Don’t forget to perform diversification and asset allocation
within your investment holdings. Also, never forget to diversify the types of
accounts that our portfolio live in.
You invest in 401(k) and IRAs, and those are pretty fine
accounts. They do limit when and how you could use your nest eggs, on the other
hand. And since you can only dip these accounts without incurring penalty when
you’re retiring, you might want to think of other places where you can invest
money to grow wealth for other important aspects and stages of your life before
retirement.
Get Rid of Potential Venues for Human Error
Most ordinary investors underperform the S&P 500 because
it only tracks the market. It doesn’t really make decisions about the next
steps to take. Investors are human and
are prone to human errors driven by emotion. If you want to be a better investor,
you have got to eliminate possible situations where you might have to make
emotional and irrational decisions. It’s very wise to automate where you can.
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