While it may be true that in the stock market there is no rule without an exception, there are some principles that are tough to dispute. Let's review 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know. Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound.
If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:. In both cases, the point is to judge companies on their merits according to your research. In each situation, you stocks have to decide whether a price justifies future potential.
Just remember not to let your fears limit your returns or inflate your losses. For related reading, check out To Sell Or Not To Sell. Whether the tip comes from your brother, your cousin, strategies neighbor or even your brokeryou shouldn't accept it as law.
When you make an investment, it's important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only trading attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.
Find what you should pay attention to - and what you should ignore in Listen To The Markets, Not Its Pundits. As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture.
Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, term overemphasize the few cents difference you might save from using a limit versus market order.
Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.
Learn the difference between passive investing and apathy in Ostrich Approach To Investing A Bird-Brained Idea. Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised.
A common misconception is that there is less to lose in buying a low-priced stock. In fact, a penny stock is probably riskier than a company with a higher share pricewhich would have more regulations placed on it.
For further reading, see The Lowdown on Penny Stocks. Different people use different trading to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it.
An investor who flounders between different stock-picking strategies will probably experience long worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timerand this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.
Want to adopt the Oracle of Omaha 's investing style? See Think Like Warren Buffett. The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most. A quote from Peter Lynch's book "One Up on Wall Street " about his experience with Subaru demonstrates this: But I checked the fundamentalsrealized that Subaru was still cheap, bought the stock, and made sevenfold after that.
For more insight, see The Value Investor's Handbook. Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience.
As such, active trading requires certain specialized skills. Neither investing style is necessarily better than the other - both have their pros and cons.
But active trading can be wrong for someone without the appropriate time, financial resources, education and desire. For further reading, see Defining Active Trading. Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps ; over the decades fromsmall-cap stocks in the U.
This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Dow Strategies Industrial Average DJIAand that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.
For more on investing in small caps, see Small Caps Boast Big Advantages. Stocks taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern.
The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax returnbut the situations are rare where you'll want to put tax considerations above all else term making an investment decision see Basic Investment Objectives. There are exceptions to every rule, but we hope that these solid tips for long-term investors and the common-sense principles we've discussed benefit you overall and provide some insight into how you should think about investing.
If you are looking for more information about long term investingInvestopedia's Ask an Advisor tackles the topic by answering one of our user questions. Dictionary Term Of The Day. A statistical technique used to measure and quantify the level of financial risk Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin?
This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. Sell the Losers and Let the Winners Ride! The following information might help: Riding a Winner - Peter Lynch was famous for talking about " tenbaggers ", or investments that increased tenfold in value.
The theory is that much of his overall success was due to a small number of stocks in his portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger.
Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting. For more insight, see Pick Stocks Like Peter Lynch. Selling a Loser - There is no guarantee that a stock will bounce back after a protracted decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments long are performing badly.
Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and trading on before your losses become even greater.
Don't Chase a "Hot Tip. Don't Sweat the Small Stuff. Resist the Lure of Penny Stocks. Pick a Strategy and Stick Stocks It. Focus on the Future. Adopt a Long-Term Perspective. Be Concerned About Taxes, but Don't Worry.
The Bottom Line There are exceptions to every rule, but we hope that these solid tips for long-term investors and the common-sense principles we've discussed benefit long overall and provide some insight into how you should think about investing. Here are 10 investing principles that should help investors enjoy long-term success. Young investors have some advantages over their older counterparts.
Read on to learn how to build a portfolio that will grow with you. Learn the technique that Buffett, Lynch and other pros used to make their fortunes. Knowing whether to sell or to hold is tough. And no rule fits all. Find out what to consider. We'll provide a step-by-step introduction on how to invest - and succeed - in this market. Start your own investing adventure with the help of some simple guidelines. Learn to overcome eight hurdles that can keep you from realizing the best returns.
You can defend your retirement savings from the ravages of a bear market. We'll show you how. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage Term measure of the fair value of accounts that can change over time, such as assets and liabilities.
Mark to market aims A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time An investment that is not one of the three traditional asset types strategies, bonds and cash. The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories No thanks, I prefer not making money.
Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator.