Looking for some tried and true ways to invest successfully? Consider the following ideas:
Invest equal sums at regular intervals, regardless of market conditions. This is called dollar-cost averaging. Your set amount (e.g., $100 per month) will buy more shares when prices are down and fewer when prices are high. When you average the cost of shares, you take the "emotion" out of investing and make share purchases regardless of what is happening in financial markets.
Reinvest your dividends and capital gains. This is an easy and inexpensive way to buy new stock or mutual fund shares using "windfall" sums of money. Simply contact your mutual fund company or stock issuer and authorize them to do this.
Buy for the long term. Don't try to time the markets. Market prices go up as well as down. Be prepared to keep your money in for the long haul, at least five years, and ignore temporary ups and downs in the stock market. Over the long term, sound investments will increase in value.
Diversify your investments. Different investments perform differently under the same market conditions. When one stock or mutual fund is down, others may be up. A well-diversified portfolio contains investments that perform differently under the same conditions, so that, no matter what changes happen in the market, you will still make money. You are diversifying when you choose stocks from several industries or a mutual fund that is balanced (one that contains a mixture of stocks and bonds). Another way to diversify is to invest in stocks and/or mutual funds, such as global funds, with international exposure.
Be patient, don't panic. Investment results are best evaluated over a period of years, not just a few weeks or months. Taxes and high sales commissions can offset capital gains if you hold investments for only a short time. When in doubt, hang on. Historically, corporate profits have grown at about 8 percent per year, along with a 3 percent dividend yield. This accounts for an average annual return of 11 percent for stock. Even with market corrections, stock still tends to outperform bonds for patient investors.
Figure profits and losses (return) in percentages, not dollars. If you have a $25 stock that goes up $5 and a $10 stock that goes up $3, which one made the greatest profit? The $20 stock went up 20 percent (5 divided by 25 = 20 percent) while the $10 stock went up 30 percent (3 divided by 10 = 30 percent).
Match capital gains with capital losses on your income tax return. Nobody likes to have a loss on their investment, but losses do occur. With careful planning, a capital loss can offset a capital gain on a dollar-for-dollar basis. In addition, when losses for the year exceed capital gains, up to $3,000 of the excess loss can be deducted against other income. The rest of the losses can be carried forward until they are used up.
Don't invest your money in anything you don't fully understand. Check out all potential investments before you invest. Go to the library and read the Value Line Investment Survey for stocks and Morningstar for mutual funds. In addition, order prospectuses and company annual reports and investigate investments thoroughly. Give your investments the "ten year old test." If you can't explain them simply, as if to a ten-year old, you probably don't understand them.