The most successful investors didn’t get where they are in a day. You have to learn the ins and outs of the financial market, decide what kind of attitude you want to maintain as an investor, invest patience and time and most of all, you need to learn the lessons from trial and error. While there are hundreds of things you should know and have to remember, there are some golden tips that can go a long way in helping you build a successful investment portfolio. You don’t need a magic formula when you stick to these tips:
Have a clear objective for your investment portfolio
First and foremost, an investor needs to have a clear cut objective for their investment portfolio. What is more important to you, long-term growth or the cash flow? How much liquidity do you want? What class of assets do you want to invest in and the reasons for it? Knowing what you expect from your money is crucial or else you will be very much like a rudderless ship at sea; no purpose or direction. This can be a terrible situation to be in, especially when you are looking for quick returns from your investment.
Make sure your investor turnover is at a minimum
If you have studied the market even a little bit, you will hear people say that you need to buy businesses instead of renting stocks. It is a fact that poor investment performance is correlated with turnover. If you don’t think you are ready for owning a business for the next few years, it is better not to purchase shares. You should only buy shares when you have gained a full understanding of the short-term stock market. Why? This is because the market is capricious, volatile and irrational and it can only be handled by someone who has knowledge and understanding of the market. It is better to invest in things that grow more valuable with time and provide you with higher earnings.
Try to keep your costs low
Every dollar that you spend in brokerage commissions, fees, mutual fund expense ratio charges and sales loads is a dollar that will not compound for you. Sure, it may seem like a small amount of money, but when you have to spend this every year, it can sum up to hundreds of thousands and even millions of dollars in wealth that you lose and will never be able to recover.
Maintain your investment holdings in a tax-efficient way
Every country provides its citizens with tax shelters they can take advantage of. For instance, in the United States, the lower and middle classes can make use of two great investment tax shelters; the Roth IRA and the 401(k). The contribution limits, unique rules and tax benefits for both are unique, but they can turn out to be highly lucrative if they are managed correctly. With a 401(k) plan, you can make investments in a variety of mutual funds and your contributions will be deducted from all taxable income. Rules are reversed for a Roth IRA in which you are taxed upfront, but nothing has to be paid on capital gains, interest or dividends upon retirement.
Don’t overpay for an asset
There is one major rule that you need to remember; price is crucial to the returns that you will ultimately get from your investment portfolio. It is not a wise decision to invest in a stock that has a low earnings yield and then expect it to rise and do well unless it is a startup that has a high growth rate or a turnaround situation that does eventually turn around.
Never rely on a single investment
Don’t put all your eggs in one basket; everyone has heard of this proverb and it needs to be applied when you are making investments. Never put all your money into a single stock as it is better to diversify across industry, sector, management team and even country. A successful portfolio is one in which the investor remains unaffected if a company cuts its dividends or goes bankrupt. It is best to keep things rolling every quarter and every year to get the highest returns.