How To Make Money In Times Of Adversity
By Janine Cox
Over the past two months both the Dow Jones and the Australian market have fallen over 14%. So how can ordinary Australian’s make money when there is all this doom and gloom around?
We have all heard the quote that if life sends you lemons then make lemonade. When it comes to the share market, Warren Buffet’s famous quote is to be fearful when others are greedy and greedy when others are fearful, and this is a comment I firmly agree with. But how do you follow this rule?
There is of course a right and wrong way to go about investing, but sadly despite all of the information out there I still see mum and dad investors continuing to make all of the same mistakes, and so the cycle repeats. But there is a better way…
The answer to building wealth is to do what rich people do, and this means having a simple plan or set of guiding principles so as not to make investing complex. Here are 10 things that that you can follow to keep you safe and ensure that you avoid the pitfalls so you can profit more:
1. Educate yourself and understand what you are investing in
Many are willing to spend years studying to gain a formal education with the expectation that they will obtain a job. Yet when it comes to educating themselves about how to create wealth, they never quite find the time.
2. Don’t over diversify
Aim to have between 8 and 12 stocks in your share portfolio as this rule lessens your risk and increases your returns.
3. Most importantly, learn how to set a stop loss
To protect your capital in the event a share falls in value. I suggest 15% below your buy price or 15% below the most recent highest price.
4. Find out for yourself, don’t take tips from others as they are often less educated than you.
5. Don’t lose
Becoming rich through the share market is not about how much you make on any one investment, it is how much you do not lose. If you lost 50 per cent in the GFC then you need to make 100 per cent to get back to where you started. This rule means learn how to sell, and I know having this one rule would have saved the majority of Australians from the GFC.
6. Do what the rich do and don’t follow the masses
The rich don’t follow the herd. It’s the opposite – the herd attempts to follow the rich. The statistics are that those who are not rich tend to move their money into the market just before the peak and out of it after the crash. Remember Buffet’s quote. Now is the time to be greedy and looking at buying for the long term, not being fearful and selling.
7. Make investing your business
If you are serious about making money for your retirement or lifestyle, don’t make investing a hobby make it your business. After all your boss will not make you rich, that’s your job.
8. Understand the pitfalls with buying investments just for income
Don’t be lured by high dividends – doesn’t make it a safe investment and in current market conditions is often there to attract mum and dad investors who don’t understand that it is pointless getting income if the risk to the capital is high.
9. Don’t be a gold digger looking for cheap stocks
Remember the tech wreck. Buy only quality stocks in the top 100 shares on the Australian market. Cheap stocks may look attractive but they are often wolves in sheep’s clothing.
10. Don’t buy and hold
As timing the market is more profitable than time in the market. My research over the years and what I have done for my book proves that anyone can achieve good returns with a little knowledge and patience. Buy and hold will only get you poor to average returns, learning to buy and then selling at the right time yields far better returns and lessens risk.
Janine Cox is the Senior Analyst at Wealth Within, a private investment company specialising in managing direct share portfolios through their Individual Managed Account Service. The company is also a government-accredited specialist share market educator, where Janine is one of only two lead trainers educating people how to invest and trade the share market. Learn more at www.wealthwithin.com.au or email Janine at firstname.lastname@example.org.