What To Invest Your Money In And 4 Other Pieces Of Financial Advice

This question originally appeared on Quora. Answer by Tom Brown.

Remember one fact that “The more you risk the more you can earn”. And one more advice for you, you should try to avoid the great mistakes (how to avoid them I will write below). You know, everyone can make a mistake and a lot of traders or investors had made them. As for my mistakes, the can be the same with people, who had answered this question. Of course, one of my mistakes is a fear to invest because of my youth and poor experience. But mostly my mistakes are deal with the situations that I’ll try to describe below.

The main thing for us is to reach the goal, overcoming mistakes and using financial literacy. Don’t be afraid of mistakes and risks. On error you should learn, and try to control the risk. From my point of view there are a lot of wide-spread mistakes that investors make. Below you can see a list of mistakes which I recommend NOT TO MAKE (because I have made them and know the results):

1. Investment in "fashionable" assets.

At the beginning of the XVII century the fashion for tulips was in the Netherlands. Bulbs of rare varieties in great demand, and its price has risen steadily. The booming market of tulips captured all: florist, businessmen, civil servants, small shopkeepers and even footmen. All bulbs are bought for resale. In 1636, the price of a tulip reaches the value of a home. But when supply exceeds demand, prices have dropped on tulips many times, which led to the ruin of many hapless speculators. The situation where an excessive demand for some assets with a view to its sale results in the rapid growth of prices, called bubble. And any bubble is known to eventually bursts. The Dutch experience has taught investors anything, and since then the speculative bubble inflated and burst several times in different countries.

2. The sale of shares after the bad news.

When the stock price falls, many investors feel akin to terror. And what if it’s the beginning of a downward trend in the market, which will lead to large losses? And then there is the temptation to sell the shares in time to minimize their losses. Novice investors often sell their shares even after a slight drop their prices, and the next day discover that the market played yesterday's losses. These are professional players and fraudsters, who make good on this. The most experienced may even manipulate the markets whom specifically spreading good or bad news.

3. Playing in the financial casino.

Sometimes actions are seen as an easy way to profit. It would seem that what could be simpler: buy stocks, wait for the market growth, sold at a profit. I tried to - DONE! To increase profits, these investors often take the money in a loan secured by, for example, an apartments. But when the market falls, investors are left without money and without an apartments. Shares trade with a view to get rich quick is not called investment and speculation. Speculation stocks akin to a game in the casino. You can win by chance, but the more you play, the more you lose.

4. The desire to get everything at once.

Many people read popular books on investments, imagine themselves to be Warren Buffett. Choosing the best stock, they immediately put it in a large amount. And then we are surprised when this stocks lags behind the market or brings losses. This happens only because the rules are neglected investment diversification and gradual entry into the market. The worst part is not even that these investors lose money, but the fact that they have a stable allergy to any further investments in the stock market.

5. The rate of success is repeated.

If you find out that your next door neighbor invests in Mutual Fund earned last year 40% per annum, do not rush to follow in his footsteps. Yes, lucky neighbor, but the market does not stand still, and after a year can easily fall. If you hurry to invest in the same mutual fund money, it can be anything else. Firstly, the growth of the market in the past does not necessarily mean that it again in the future. Secondly, we should not blindly copy someone’s strategy. You do not know how much time and effort spent your neighbor to play well in the market!

In order not to be an investor who becomes to bankruptcy I suggest you obey some simple rules:

• Formulate your vision, taking into account the investment objectives, attitude to risk, age and so on. Otherwise, the scope of the investment will be for you a cat in a bag.
• Start with simple tools (such as mutual funds), and as they gain experience, go to the more complex. The same principle should be applied when choosing a strategy - start with a conservative and move to more risky.
• Stick to the chosen strategy, not trying to catch a dubious success. Investing in the stock market is calculated on the horizon for at least two years. The investor often simply doesn’t make friends with a calculator or lazy to properly examine the object of investment. More often stocks bought simply on the advice or example of friends amateurs.
• Reduce the risk of loss due to diversification of the portfolio and the gradual entry into the market.
• Remember, investing in the stock market - is not the way to get rich quick, and long and hard work. Investing even trading - still a long process. You can’t be rich instantly.

Of course, you can avoid mistakes reading some articles like these ones but even reading books and pieces of advice of successful investors never give you 100% guarantee of your investment quality. That’s why I recommend you obey the rules and recommendations above.

Also I recemmend you to read blogs of famous investors and their experience of investing, sometimes it’s interesting.