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Articles
Successful
investing requires three factors in combination: knowledge, experience and the
ability to control one’s emotions. The first factor can be achieved by
immersing yourself into the topic, reading everything you can to familiarize
yourself with terms and techniques of the craft. Once you enroll in a class,
you can move toward the second objective by being mentored by a professional.
The last
factor, controlling your emotions, is perhaps the most important one and
requires more introspection on your part to determine what type of investor that
you want to be. If you are losing sleep at night with anxiety over your
investments, then perhaps a modification in your style or type of investing
regimen is in order. The last factor has more to do with your personality, your
individual investment objectives, and your tolerance for risk.
Investors
generally fall into two different types: the ones who gather information and buy
and hold for long periods of time, and the other ones that prefer a more active
trading style, moving in and out of the market to record short-term gains. It
is recommended that you match your personality type to your investing style to
get the best results.
Investing
for the most part is all about managing risk. It just so happens that the
different types of investment vehicles can be arranged based on their individual
risk profiles, as depicted in the diagram below:
As
you move up the pyramid, the risk profile increases. Generally, the reason a
person will take on a higher level of risk is for a greater potential for reward
in the form of a higher return, at least enough to justify taking the risk in
the first place. As you move down the pyramid, your choices become safer, but
with lower rates of return. A prudent investor understands that all investments
involve risk. Do not invest in vehicles that you do not understand completely.
Many brokers have “virtual” services that allow you to practice investing and
simulate real life trading situations. These practice sessions can also help
you identify where you feel most comfortable in the investing spectrum.
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