Smart investing, how do you learn this?
Investing as such is not difficult. The advent of online brokers makes it easy to open and close investment positions without too much effort. However, investing is fundamentally different from smart investing . If you want to achieve good returns on the stock exchange, it is important that you look at the market as a smart investor. But how does a smart investor look at the market? And what makes someone a smart investor? Below you can read all about smart(er) investing. This article will focus on periodic investing and long-term investing . Other forms of investing are not ‘dumb’ investments, there are enough investors who achieve a good return with short-term investments .
When is it smart to start?
Investing starts with starting to invest . But when is the ideal time to start? Fortunately, you don’t have to look very far for the answer. The best day to start is today . The English often say: time in the market, beats timing the market.’ It is less important to try to time the market when you want to invest for the long term. If you get in today, you ensure that your money has as much time as possible to yield a return. When it comes to investing, the cliché also applies: time is money.
It is better to invest money monthly in sensible investments than to leave it in the bank. Due to very low (sometimes negative) savings rates and inflation, money in the bank is often worth less every day.
However, for many, the step is not that easy. Many people are afraid to start investing, because they think they are not good at it (yet). To help you get started, below you will find a selection of the most important and fundamental rules for smart investors. So take advantage of it! Before these tips are discussed, a brief explanation of the importance of periodic investing follows.
Wealth building through periodic investing
Most investors who aim to build up assets for the long term swear by investing a fixed amount periodically. For example, if you invest €150 per month, this amounts to around €1,800 per year. Up to this point, you would say that this sum is not that impressive. What is more impressive is the number that you will have left after 30 years of consistent investing with an average annual return of 8%. After 30 years, you will have more than €210,000 in your investment account. Such figures make it interesting to delve into the subject of investing.
But how can this amount actually be so high? This has everything to do with an effect called exponential growth. Among investors, this is also called ‘ compound interest ‘ or the compound interest effect. This is a principle that has been around for ages. Albert Einstein even called it the eighth wonder of the world. Compound interest is based on the fact that you receive a return every year, on top of the return you achieved in previous years. This means that your return will continue to increase, regardless of the fact that this return remains practically the same in percentage terms.
A smart investor uses compound interest. This purely mathematical principle can earn you a lot of money. With compound interest, you put your money to work.
Smart investing: 10 fundamental rules
To help you get off to a smart start with long-term investing, 10 basic rules:
- Pay attention to costs, costs reduce potential returns
- Spread risks, so you are not dependent on single developments
- A good mindset, be critical and don’t just accept everything
- Use a strategy, invest according to a plan
- Are you aware that return and risk go hand in hand?
- Be prepared for setbacks and bad times
- Don’t trade based on emotion
- Understand the products you invest in
- Consider how much time you want to invest in your investments
- Always invest only with money you can afford to lose
1. Pay attention to the costs
Investing is often done with the goal of achieving a good return. Costs like to nibble away the necessary euros from your return; that is of course a waste. It is therefore important not to underestimate the costs. Costs that seem relatively low at first glance can make a nice sum in the long term. That is very annoying.
But how do you ensure low costs? It starts with the broker. Skip expensive providers – such as many banks – and choose a cheap broker. A cheap broker does not necessarily have to be unreliable. Investing yourself is cheaper than having someone invest for you. After all, you pay for this too. This is again at the expense of your return. Roll up your sleeves and invest yourself with a cheap broker. Of course, it is important that you know what you are doing.
2. Risk spreading
Ask a group of investors what they consider the most important rule when it comes to investing and chances are pretty good that a few investors will start talking about risk diversification. Risk diversification is very important when you want to achieve structural returns . For example, if you put all your money in 1 share, and that share suddenly performs a lot worse than expected, you will lose a large part of your portfolio in one go . That is of course a waste of your money.
A smart investor spreads his risks across different regions, sectors, currencies and products. So you would do well not to make yourself dependent on a certain share or a certain group of shares. For example, do not focus purely on the American market or purely on tech shares, even if you trust them (very) much. Unfortunately, the market does not adapt to the investor, but the investor must adapt to the market.
A sound risk diversification limits the damage when a position does not perform exactly as you had hoped. There will always be certain positions that perform a little less well. However, if you have included enough products in your portfolio, there will usually be one that does perform well. In this way, your portfolio compensates itself. If your entire portfolio is in the red, there is a good chance that your risk diversification is not optimal.
3. Don’t believe everything you hear
There are many stories going around about investing. There are enough people who proclaim that investing is only something for very rich or old people. That is of course not true at all. Investing is accessible to everyone today, regardless of wealth. You can start investing with just a few tens of euros per month.
Investing is easier to start with than you might think. The internet is an incredibly useful source of information. The fact that you are reading this article, for example, is already a step in the right direction.
Then there are the people who – perhaps with good intentions – claim that you really should buy a certain share at that moment, because it will become very valuable. It is relevant to realize that no one can know what the market will do. Investing remains speculation . People who have confidence in a certain product often like to share this with others in practice. However, do not blindly rely on this information and always do your own research.
So do yourself a favor and act like a smart investor when it comes to information from others. Do your own research and always be critical. Most people who tell tall tales about investing are often less successful than they pretend to be.
4. Have a good strategy
In practice, it turns out that a bit of structuring and stability can do a lot for the discipline of an investor. It is therefore important to draw up a rock-solid investment plan. See it as a kind of road map. What is your goal and how do you want to get there?
An investment strategy depends on your risk appetite. Determine how long you want to invest and how much money you want to accumulate. For example, you can calculate how much money you need to retire a few years earlier. Based on your target amount, you can determine how much risk you need to take to achieve this within a certain time. Do you need to take too much risk? Then you need to adjust your target amount or use a longer horizon.
Depending on the amount of risk you are willing and able to take, you will be able to determine which investment product(s) are suitable for you. Investment products with a higher potential return are riskier. So keep this in mind. Read more about investment forms and their risks .
You will also need to come up with a strategy for entering and exiting. Do you only enter at relatively low prices or do you invest money structurally every month, regardless of the price level? A smart investor is a conscious and cool-headed investor who can stick to his investment strategy, regardless of market conditions.
5. Accept the risks
Investing involves risks. You will have to accept this fact when you choose to invest. Abstractly speaking, as an investor you get paid for taking risks. In general, the rule is: high risk, high reward . The more risk you take, the higher your potential return. If you want to take less risk, you will have to accept – with some exceptions – that you will potentially achieve less return. There is nothing wrong with this.
That you have to take risks is a fact, the only question is how much risk you want to take. We already briefly discussed that this largely depends on your investment strategy. In that context, you could say that young people can generally take more risks. After all, at a young age you have more time to wait for the market to recover. Many investors choose to invest more safely as time goes by, for example in bonds or shares that pay a high dividend.
6. Prepare for bad times
Bad times are part and parcel of the stock market . Investors generally assume that a crisis occurs every eight to ten years. A world in which the markets are always rising is just an illusion. A smart investor anticipates a crisis in advance and knows how to trade optimally profitably when such a crisis actually occurs.
But how do you anticipate a crisis? First of all, you do this by buying your investments in phases (spread). Never buy a large position at once. After all, you never know for sure whether the price is at a peak or not. By buying in phases, you know for sure that on average you will not have the worst possible entry. Of course, you will sometimes buy at (too) high prices. You eliminate the damage from this by buying in phases and by holding positions long enough.
You can also profit very well from a crisis. The stock markets often collapse and this results in shares that are, as it were, on offer. It offers the opportunity to make investments at very low prices. You can profit optimally from this when the market recovers. The smart investor will always buy more in times of crisis, knowing that recovery is the next step.
7. Keep emotions at bay
A good and smart investor is able to partially switch off emotions when it comes to investing. When you let yourself be guided by emotions, there is a big chance that you will make mediocre to very bad decisions regarding your positions. A smart investor is rational and is also able to remain rational when the markets are doing badly. It is therefore the smart investors who buy more in bad times and remain calm.
People naturally avoid risks. It is therefore not surprising that dark red figures on the market immediately scare you. If you want to invest successfully, it is important that you can see through this layer of fear. Keep your wits about you and act completely as you have noted in your investment strategy. Do not close positions unnecessarily early and do not open positions that are purely based on emotion. This way you guarantee the quality of your portfolio. Positions that are opened based on emotions are a source of sleepless nights.
8. Understand your portfolio
Buying a bunch of random investment products is a bad idea. Even if you read in your favorite newspaper or on your favorite website that it must be a good investment. It is essential that you can tell everything about each position in your portfolio. Why do you think stock X has so much potential and what is your vision for the future?
Basic knowledge of certain investment products starts with basic knowledge of investing as such. For example, do you know what factors can influence the price and do you know how to perform a good analysis with regard to a certain investment product? Start with the basics and expand your knowledge further and further to specific products, sectors or regions. Specialization is not possible without a solid foundation. Use our knowledge base to read up well and be well-prepared.
9. Determine how much you want to invest
In broad terms, you could say that there are two ways of investing: active investing and passive investing. It hardly needs explaining that an active investment strategy takes up much more time. After all, you will have to spend more time following the prices and opening and closing positions. An active investment strategy fits well with an investment product such as the CFD . This is because with CFD trading you can use leverage, which means that your positions will be profitable more quickly with relatively small price movements. CFDs also offer you the opportunity to go short, which means that you can also profit from price drops.
However, if you want to spend less time actively following the stock markets and you agree with the returns that you can achieve with relatively passive investment products, you can consider passive investing. Products that are ideally suited for this are, for example, ETFs or bonds. ETFs are, as it were, baskets of shares. But regular (individual) shares can also be part of a passive portfolio. Do take into account the fact that with individual shares you have to pay extra attention to your risk diversification.
Do you want to try out active investing? Then you can consider creating a demo account with a broker. Such a demo account offers you the opportunity to invest with fictitious (fake) money. This way you can see if active investing is something for you.
10. Only invest money you can afford to lose
You’ve probably heard the stories of people who have fallen into a financial hole by investing in the stock market. However, a smart investor will approach it wisely and will never find himself in such a situation. One of the most important rules regarding successful investing is the rule that you should only invest with money that you can afford to lose.
So don’t transfer your entire bank account to your broker, but keep enough money for regular living expenses. In addition, it is important to have an emergency fund. This way you are prepared in case, for example, your washing machine breaks down or you are suddenly confronted with high healthcare costs. The importance of an emergency fund is very great. After all, you ensure that your investments can remain unaffected. This way you can still sleep well at night.
How and where to invest?
Investing has become relatively easy these days. All you have to do is create an account with a broker and you can open your first positions within minutes. However, it is important to choose a broker that suits you and that charges the lowest possible costs for the investment products you wish to invest in. Comparing is definitely worth it! Compare brokers using our tool.
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