The increase in online brokers has led to more and more people investing their money, but 76% of retail investors lose money in the market.
My 10 tips to being successful in the stock market starts with a small deposit into an online brokerage account, a bit of education, then a planned investment in a reliable company. There are literally millions of people that invest in the stock market, there are winners and there are losers, the difference between the two in my opinion are a mixture of 10 things.
The basic probability tells us that out of all the buyers and sellers in the market, the split to winners and losers is 50/50. In my eyes it’s more like 90% losers and 10% winners, that is because a successful investment is not the result of luck or probability, it’s the application of the simple principles that I will teach you in this article.
It’s all about getting started, so let’s do it.
1. Leave Your Emotions Behind
Success is a mindset… That old saying that no one really gets. Warren Buffett stated “success in investing does not correlate with your IQ… You need to control your temperament and stop the urges that get other people in trouble”. I think that is a much better saying.
The wisdom of Warren Buffett is what has made him an icon in the investing world.
I think Buffett is telling us to follow our heads, and not our guts. We need to let knowledge, experience and research drive investing decisions, if we follow a feeling or a tip from a friend, you are gambling, not investing. That’s the difference between investing and speculation.
On top of that, you should research every purchase before investing your money, don’t just buy on a hunch.
Trading which is triggered by emotion is the number 1 thing that will hurt your portfolios profit. All the tips that follow can help you train your mind to become a level headed investor.
2. Don’t Pick Stocks, Pick Companies
It’s easy to forget that behind the ABC of the Bloomberg ticker tap there are actual businesses.
Bloomberg, CNBC, Sky, and all the major financial news outlets online and on television have price alerts that whip across the bottom of our screens. Just because there is a price alert doesn’t mean the company is worth investing in.
You’ll come across an overwhelming amount of information when you screen potential companies to invest in. But it’s easier to sift through the trash information and find the crux of the business when you have your ‘CEO hat’ on.
You want to know how this company operates, the basic business model, any major competition in the industry, profit, and long term prospects. Most of these things are available on major investing research sites. One of the main things I look at is intrinsic value of the company, future cash flows, and P/E ratios.
This process is what investors call fundamental analysis.
3. Plan For Mental Breakdowns
Every investor, including me has had a mental breakdown where they just want to sell it all, or they want to ‘change the relationship status’ with their portfolio. But making a heat of the moment decision can lead to loss of long term gains, and huge capital gains tax bills.
What we call the herd mentality can cause mental breakdowns like this.
Buying low and selling high is a good place to start, but when you’ve got a winner, why sell a stock on the up that is potentially paying dividends.
You should keep a journal… Yes, that’s right, an investing journal. You don’t need to keep it under your pillow, or dot your ‘i’ with a little heart, but you should keep one. And this is what you should keep in it:
- What percentage of your portfolio growth is that stock responsible for?
- Why did you buy that stock in the first place?
- How much dividend does this stock pay you?
- What is the future of this company?
- Finally, what circumstances would make you sell?
You should literally spell out what attracted you to the company in the first place, what gains/loses you’ve made during the time you’ve had it, then a goal or reason you would have for selling it.
Some of the online brokers offer this feature built into their software. One of them is Trading 212. Every transaction you make is logged and stored in your account history, you can see individual stock growth and portfolio wide growth. I usually look at my log once every week, just to keep an eye on things. I also read through it when I plan to make decisions regarding companies I hold.
4. Don’t Sweat The Small Stuff
To be a successful investor you need to start looking at the bigger picture. Panicking over small short term movements, or minor corrections can not only affect your mentality when investing, but also your decision making.
Have confidence in your investment choice and stick it out for the long run. Don’t be swayed by a bit of volatility.
I hear people all the time, “my portfolio is $20 lower than it was yesterday, that’s 0.1%, could we be at the start of a crash?” 9 times out of 10, no we aren’t at the start of a crash. Share price moves up and down everyday,
Let me put it this way. I helped one of my students put together his first investment portfolio on Trading 212, he started with £100 (he is from the UK). It was a solid portfolio with lots of long term potential. 3 weeks later he emails me… “Chris, my portfolio is down 3%, I think we must have made a mistake”. I simply said, “Don’t worry about short term movement… We are looking long term”. The return on the portfolio after 6 months was 9%, and this kept growing for the next 2 years until he decided to sell and start another one.
Keep your head on straight and make sure it’s pointing to the future.
5. Build Your Portfolio Over Time
Dollar-cost averaging is one of the safest methods of building your portfolio. It allows you to balance your investment using consistent deposits into your account. With Trading 212 you can set up a month plan to top up your account, and with the use of fractional shares you can start with as little £1.
By using dollar-cost averaging you protect yourself from a volatile market, lowering your average price per share. Also, every month you have a chance to adjust your portfolio, whether that’s by picking new stocks to invest in, or boosting your investment in one you already own.
Building your portfolio over a longer period of time also helps you to build your knowledge and reduce the amount of mistakes you make.
If you need the money you will be investing in the near future, say within the next 5 years. You need to find out if you should be saving or investing.
6. Plan For Uncontrollable Events
Uncontrollable events happen all of the time, whether it’s a correction in the market, or you need some cash to fix your car.
The best way to plan for the future is to have a cash fund you can get your hands on in times of difficulty. But in terms of the market, it is important to diversify your portfolio. There are 4 main types of stock you can invest in:
ETF’s are the safest investment, and should comprise at least 10% of your portfolio of different funds or bonds, this will keep you safe from market wide crashes. Blue chip stocks are secure investments, but they tend to flow with the consumer market. Make up the bulk of your portfolio with these blue chip stocks, but diversify between 3 or 4 sectors, you don’t want to hold stocks in one industry. Growth stocks hold the most risk and should be dealt with carefully, really I wouldn’t recommend these to beginner investors.
You need to learn how to find a good quality investment.
7. Become A Value Investor
Value investing is a long term strategy that all investors should consider. Using technical analysis, you can find a lot about a company. Once you know the financial background of a company, you can estimate the future earnings, and better yet, your earnings per share.
Value investors look at the future value of a company. No matter whether you want to invest in dividend stocks, growth stocks, or ETF’s, you should only invest in companies that you think will increase in value. That might sound simple and obvious, but you’d be surprised how many investors buy stocks because of the dividend yield and not pay attention to the overall company.
8. Think 5 Years Ahead
5 years is the minimum time frame you should look to invest in a company for. You may sell before 5 years have past, but when you complete your research and calculate your expected profit, you should calculate the growth for 5 years.
If you want to get into short term trading, you could try forex or commodities. Stocks take way too much research to be short term investments. If you have a yearly growth of 8% which is the market average, invest $500 and in 5 years you will have $734 due to compounding interest. But traders that constantly buy and sell investments, stand a chance of making more mistakes, and reducing their profits.
Making 1 decision for a 5 year investment is a lot easier than making 10 decisions for 10 6 month investments.
9. Set Yourself Some Financial Goals
A financial goal will help you stay focused and calm throughout your journey. You should find your inspiration, why do you want to make money in the stock market? Retiring soon? Want to learn something new? Want to build wealth for your family? All of them are great places to start.
Once you have your inspiration, you need to figure out what it takes to get there and you need to write it down. Your main goal should be made up of 5 to 10 mini goals, they should be specific and they should have a clear end point. You need to think S.M.A.R.T:
- Time scale
What do you want to do? Can you achieve it? How will you achieve it? How long will it take you to achieve it?
10. Always Keep Learning
The more you learn, the more opportunities you will see. Risk is all about mindset and experiences.
If you have no experience and zero knowledge, you will see every potential investment as high risk because you don’t know what you’re looking for. But if you keep learning and gaining experience, you’ll keep getting better at picking good investments.
Just think about math at school, you started with 1+1, then when you gained more knowledge you moved to a+b. Now that you now a+b, you’ll be able to work out c+d. Investing is the same principle.
Pain Free Investing has an investing academy to help people of all levels reach their goals. You can check it out on this website just here: