Get rich fast. 350% profit in just one month! 25 and already a millionaire investor. This share will at least TRIPLE over the next year.
Sounds really good? Yea, and they’re probably too good to be true.
You are probably reading this because you are interested in the next big investment tip. You want to invest your money but promises of fast returns often derail you to click onto articles like this.
So here’s my No.1 investment tip: Don’t follow tips.
Don’t Follow Tips
It’s always very tempting to listen to what you friends are saying and then follow suit. You see, if they are right about the next hot investment, both of you can reap the rewards and celebrate together. And if they’re wrong? Well all sorts of thoughts come into mind. Oh man I listened to the wrong person. Maybe I should have followed Alex’s advice instead. He seems better at investing.
All except maybe I should have done my own due diligence in my investment decisions. Doing due diligence does not equate to spending hours listening to the tip-giver and trying to get yourself convinced that this investment shall be the next big thing.
Carrying Out Your Own Due Diligence
It refers to taking a step back from all the noise and starting to understand what you may be going into. There are definitely many pros in buying a certain share, but do consider the downsides. What if the deal did not go through? Is this industry really thriving? Having a balanced view of the potential investment is crucial.
How Much Can You Put Into Investments?
Next, understand your current financial position. In my view, investments should always be made with the excess funds one have, not with the money you need on a routine basis like rent, meals and transport etc.
Assuming you have $2000 in extra cash, is it enough to make the investment? Share prices may be above $2 whereby $2000 is not enough to purchase 1 lot (1000 shares) of the shares which is normally the smallest quantity. Next, have a plan to execute your investment.
Have a Plan and Follow it
An investment plan should be simple and customised to your own needs. To develop a plan, first consider the following points:
1) How much spare money do I have for investment? Will I need it any time soon?
2) Am I comfortable to put this money into investments, knowing that there is a possibility of me losing everything?
3) I’m not a daring person, so $____(your own funds) is the maximum I’m willing to lose.
Knowing how much you are willing to risk is critical because many just jump into investing without knowing their psychological limits. Once they make a loss, they just decide to hold on to the shares till it comes back to the original price and then sell them away, relieved that they did not make a loss.
This action is dangerous because share prices may not rebound back to the previous levels or worst still continue to tumble. As losses become bigger, you may feel helpless and regretful. Even if prices rebound and you manage to sell it at previous levels, you have just wasted your effort and time to monitor this ‘investment’.
By knowing the maximum you are willing to risk, you can learn to cut your losses when you are wrong in investments.
Example of an Investment Plan
For example, you may have done your due diligence and decided that Singtel is a good stock to own. As of my writing now, Singtel’s share price is currently $3.86. You have $4000 spare for investment.
You feel that your tolerance for risk is high and you are willing to risk a maximum of 25% of your money, which equates to $1000. You’re looking for dividend returns from Singtel and you are willing to sell Singtel at a profit if the share price reached $5.
With the $4000, you buy 1 lot of Singtel shares:
1000 shares (1 lot) X $3.86 = $3860
Total Investment Amount = $3960 + $30 (estimated commission charges) = $3990
If the share price falls to $3.00, do not panic. You have already established that your maximum allowable loss is $1000, which means you will only sell if the price falls to approximately $2.86. Sometimes, others are unable to take the emotional stress and thus sell the shares prematurely at a loss. Therefore, you need to set your own price level guides for buying and selling.
Similarly, if the share price rises to $4.50, do not be rash and sell it away because of a little greed. Remember your plan and stick to it. Of course there will be so many other possibilities apart from your own decision. The price may fall back to $3.86, which will mean you could have locked in a profit earlier. The price could shoot up all the way to $5.00 and hit your target, of which you should sell according to your plan and congratulate yourself for being disciplined.
Cut Your Losses and Let Your Winners Run
The point here is that you will not know how to the price levels will be going to move. Markets can take you by surprise (positively or negatively) so it’s wise to follow the advice of cutting your losses and letting your winners run.
If you think you need some help in being disciplined with your own plan, I strongly suggest you learning about the Trailing Stop Loss. It’s my best tool for managing my losses and allowing my profits to go as high as they can. I’ll write more about it in another post but do read about it first if you can.