Before deciding to put money into any financial product, the saver should bear in mind ten aspects that will help him not to make a mistake. “An investor needs to do very few things right if he avoids big mistakes. Thus, it is not necessary to do extraordinary things to obtain extraordinary results”. This is one of the famous messages of the American guru Warren Buffett.
Before putting the savings to work, it is advisable for the investor to sit down and analyze the steps to be taken. Here are ten tips to consider:
- Don’t invest in what you don’t understand. This is one of the recommendations that the CNMV gives to all Spanish investors. Nowadays, savers have a wide range of products at their disposal: shares, investment funds, derivatives, fixed income, etc… But not all of them will be suitable for your investment profile. Therefore, it is important to understand both the characteristics of the product (expected return, risk, time horizon, liquidity) and the market in which it is traded. If it is the stock market, you should never invest in a company without understanding its accounts, according to Fidelity guru and fund manager Peter Lynch. The biggest losses in shares come from companies with a weak balance sheet,” says the expert.
- Get to know your investor profile. Once you have understood the product you are interested in, you must make sure that it fits the type of investor you are. With the entry of MiFID II, entities have focused on the correct marketing of financial products. With the entry of MiFID II, entities have focused on the correct marketing of financial products. As a general rule, if a person is not willing to lose a lot of money and wants to take little risk, they should be considered conservative. In this case he should be willing to accept a low return, as risk and return are usually directly related: the higher the expected return, the higher the risk taken. Find out what his profile is by clicking here.
- Contrast official information. Savers should know that they have at their disposal all the detailed information on the characteristics of a product on the CNMV website. In this place you will be able to see from the relevant figures of each listed company, as well as the detailed data of the investment entities and the products that are marketed (funds or sicav). In the case of the stock market, Buffett usually says that the right thing to do is not to take the annual results too seriously. Instead, it is best to focus on 4 or 5-year averages that give a more realistic picture of a company.
- Don’t play all the capital to one card. Even the riskiest investors tend to play all the capital to one card. To reduce risk, it is right to diversify your investment with asset classes. And if you only invest in the stock market, it is advisable to have companies from different sectors and profiles in your portfolio that can help you to avoid market volatility.
- Invest only the money you do not need in the short term. One of the maxims that the saver should comply with is that you should only invest the capital that you do not need in the short term, and that no matter how conservative a product may seem, there is always a risk. Therefore, the individual must always be prepared to lose part of the investment and that this does not create a serious problem.
- Adapt your investments to the time frame of your objectives. There are products that operate at several months (bills) to one year (deposits) or several months (investment funds). On the other hand, the stock market does not have a defined time horizon beyond that which the investor wants to give it. According to the experts, the best thing is to combine assets with different time periods in the portfolio to reduce volatility.
- Don’t go after yesterday’s success. Another maxim that savers should not forget is that past performance does not guarantee future performance. In other words, historical returns do not have to be repeated, so you must always be ready to face losses. Nobody knows what the markets will do and how they will affect products, even the most successful ones of the last decade.
- Know the characteristics of the channel you use to invest. If the saver wants to contract a product or place an order in the stock market via the Internet, he must take into account the conditions of the contract. One of the drawbacks of these agreements is that no one will be able to solve your doubts live. In the case of the Exchange, it is essential that the investor remembers that the speed of data transmission affects the order transmission phase but not the execution phase. Therefore, when you see on your screen that the order has been “accepted” or “generated”, follow the market closely and be interested in its effective introduction into the market.
- Monitoring and discipline. All investments require constant monitoring, especially those related to the stock market. If someone decides to buy shares, he or she must be aware of the price they reach at all times, set a goal for themselves and act with discipline. That is, if you buy a stock, you should be clear about how much you are willing to lose and sell when you reach a certain level. Greed is the great enemy of the investor, hence the saying: “let the last euro be won by another”.
- Counseling. Generally speaking, investment products and market operations are becoming increasingly complex and require a great deal of attention, so every saver must assess whether it is advisable to resort to professional advice to manage their portfolio. If a person decides to take on an expert, he or she should be responsible for determining your investment profile and making several proposals so that you have different options to choose from.