5 things a beginner investor should remember

This post was originally published on this site
A good investor husbands their resources and looks for long-term gain. (Rawpixel pic)

One of the most commonly asked questions is, “How should I invest my money?” It reveals an awareness of the need to invest but also shows that most people lack the knowledge and tools needed to make good investments.

This can lead to looking for quick, convenient profit without much effort. Sadly, most of these pursuits ended up badly, leaving people disappointed, confused and less confident about their financial future.

You could be a fresh graduate earning your first real money, someone who has just received a bonus or a pay rise, a business owner with some spare cash, or a retiree looking to stretch your retirement dollar, but here are five things you can do today to learn about investing.

1. Don’t ask for tips

The fastest way to screw up in “investing” is to ask for tips. How often do people lose money after investing in stocks after receiving a tip, hearing a rumour or comments and advice from trusted friends and family members?

People who ask for tips are not really investing, they are gambling with their money in the belief that they are investing.

2. Buying an investment does not make you an investor

Many people believe that investing is about putting money into multiple investments in the hope that profits from several of these investments will outweigh losses incurred on others in the future.

This person may spread their capital evenly into stocks, unit trust funds, P2P lending platforms and cryptocurrencies. This is commonly known as diversification.

There is nothing against this method of capital allocation. But the reasoning behind the purchases of these investments must be considered because it is the person’s reasoning that defines whether or not they are an investor or merely a gambler.

If the person invested in the stocks after studying them and they possess clear objectives as to what they wish to achieve, this person is an investor. But, if the person buys his stocks on an ad-hoc basis without studying them, they are likely a gambler.

This applies to any asset class – unit trusts, cryptocurrencies, debt or equity crowdfunding platforms, gold, silver, real estate and so on.

3. Real investors focus on cash flow productivity, not capital gains

Focus on long-term cash flow, not immediate profit. (Rawpixel pic)

Many investment decisions are made based on the ability to achieve quick capital gains. There is always excitement about investments that have doubled or tripled one’s capital in a short period. A lot of people lose money on such investments.

True investors are not focused on capital gains. They focus on the investment’s ability to generate cash flow over the long term. It does not matter what the investment is.

Put simply, true investors would invest in:

  • Stocks to earn dividend income (dividend investors)
  • Stocks that reinvest their cash flow for more cash flow (growth investors)
  • Real estate to earn rental income (real estate investors)
  • Oil palm estates to earn harvesting income (oil palm plantation owners)

The thing is this: An investor should make one single transaction to buy an investment, be it one stock, one property, or one palm oil estate to derive recurring passive income over the long term.

4. Different people invest differently

Here is a question: “How should I invest RM100,000?” There is no true answer. It depends on an individual’s age, financial status, skills, goals, preferences and so on.

For instance, if the person is 30 years old, they are likely to consider buying a piece of property with debt to earn rental income. But a person over 60 years old may not be able to get a mortgage with the same terms and conditions, so they would put their money elsewhere.

The best thing to do before investing is to design an investment game plan that is suitable for you. This brings us to the final point.

5. It is the investor who determines the level of investment returns

Study the most successful investors, such as Warren Buffet, and learn from them. (AFP pic)

The more skilled the investor, the higher the returns. Instead of chasing tips, an investor will focus on continual learning and strive to improve their skills and systems.

Ultimately, it is the mindset, skills, principles, experience and systems that determine the returns of an investor. It is having the Midas Touch, where whatever you touch or invest in prospers. It is not about what you invest in, but who you are as an investor that matters.

Conclusion: How to invest if I don’t know much about investing?

The first thing is to admit that you have no idea about investing. Wisdom often begins when you acknowledge your shortcomings.

Second, identify successful investors whom you respect and learn from them. Read their books or books written about them. Explore what made them successful.

Third, acknowledge that successful investing is not about buying an investment and hoping it will somehow magically go up. If investing were that easy, everybody would be a millionaire by now.

This article first appeared in kclau.com.

Ian Tai is a financial content machine, dividend investor and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’, and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar with KCLau.com.