9 Essential Tips Every Investor Should Know

Crystal balls are pretty hard to come by particularly when it comes to investing in the stock market. To help you shape the most fruitful investment strategy, Black Enterprise surveyed a handful of experts. Here’s what they believe are nine of the most essential tips for successfully managing your portfolio:

Identify your tolerance for risk.
Just about everyone’s perspective on risk has changed over the last few years, thanks to major market shifts and the economic downturn. Prior to December 2007 (when the recession officially began), investors were accustomed to a stock market that generally moved in a positive direction. “Risk was a nebulous concept,” says Roderick Barnes, CFP, an Ameriprise financial adviser in Huntersville, North Carolina. After all, “how could you get an accurate gauge on your risk tolerance if you’d never experienced a real loss before?” asks Barnes. “We no longer need to wonder, since the downturn offered a painful reminder of the true meaning of risk,” he says. “We now know that it is possible to lose money by keeping your money in the stock market. The more you take on, the more exposed you are to potential losses. Risk has been clearly defined, thanks to the recession. The key is to clearly understand your time frame, goals, and investment objectives,” says Barnes. “What is your comfort zone? What can you lose and still have peace of mind?”

Diversify.
According to Kasper Mingo, a MassMutual financial professional with HF Financial in Charlotte, North Carolina, more than 90% of Americans have the majority of their assets in one or two asset class accounts. That’s way too many eggs in one basket, says Mingo. “Proper asset diversification–and not just stock diversification,” he stresses,

“will spread the inherent risk of high tax liabilities and longevity risks over different asset classes to reduce these threats to your financial independence.” The point is, stocks and bonds are great, but–where appropriate–investors should hold a basket of other assets as well. These include commodities, real estate, and money market instruments.

Keep your emotions in check.
Many people invest with their hearts, rather than their heads. Train yourself to use solid, rational reasoning based on good research. And while the markets are clearly emotionally charged, that doesn’t mean your own investment strategy should be, says Steven Siebold, the Palm Beach, Florida-based author of How Rich People Think. Keep feelings out of the equation, and the investment should not only be more sound, but also more financially viable. “Try to switch over to logic-based thinking,” says Siebold, “and leave your emotions by the sidelines.”

Don’t try to be a market timer.
Sticking to a sound, diversified investment philosophy that doesn’t rely entirely on the whims of the market helps you avoid losing too much by changing strategies too late or too soon. “Still licking their wounds, many jittery investors pulled all their assets out of the stock market just as it hit bottom two years ago,” says Barnes. “In the time since, while they’ve remained on the sidelines, equity markets have bounced back significantly. In some cases, that recovery has represented missed opportunities to recuperate much of what was lost.” Bottom line: A University of Michigan study found that, over a 30-year period, market timers averaged an annual return of 3.28% whereas long-term-minded investors averaged 11.83% per year.

Identify opportunities for yield.
For those investors who aren’t quite ready to venture back into stocks yet,

Barnes says it may make sense to dial up the risk tolerance beyond low-yielding Treasuries and look into bonds that offer higher yields. “The search for yield doesn’t have to be a giant leap,” says Barnes, who adds that investors can find opportunity in the middle of the quality spectrum. “Certain investment-grade corporate bonds and higher quality, high-yield bonds offer greater yields than Treasuries, with better compensation for inflation risk.” Dividend-paying stocks provide another option. The stocks of financial services and utility companies are the traditional choices for investors interested in dividends, but it’s wise to keep your options open. Dividends on common stocks are not guaranteed, while preferred stockholders receive a fixed rate of return, notes Barnes. If you are interested in adding an array of dividend-paying stocks to your portfolio, look for mutual funds that focus on “equity income,” “dividend income,” or “growth and income.”

Have a clear purpose and defined expectations.
Quite often, people believe they are investing to earn a “maximum” return, or to beat the market–neither of which is true, says William Pitney, president and CEO of San Francisco Bay Area financial advisory firm FocusYOU. He suggests laying out a clear investment purpose and expectations before jumping into the market. For example, if you are investing for retirement, plan for where your portfolio needs to be 20 to 30 years in the future. You will likely live in retirement 20 years or more, so your portfolio must outpace inflation so you can afford to live. Reacting to short-term market fluctuations, no matter how dramatic, will only hamper your long-term success. “Most people have a very personal reason for investing that usually has to do with more than just the money,”

says Pitney. “For some, it is about achieving financial independence and maintaining their own sense of dignity and self-worth. For others, it is about expressing love for their family and community.”

Look at investment fundamentals like you do weight-loss.
As anyone who’s tried to shed pounds can attest, the basics are simple to understand, says Pitney, but not easy to achieve. After all, everyone knows how to lose weight by eating healthier and exercising more. Putting that advice into action isn’t always as easy as it sounds. Similarly, says Pitney, “everyone knows that to succeed at investing you need to buy low and sell high, diversify your holdings, and focus on the long term. However, study after study shows us that investors do the opposite and it has cost them dearly.” Similar to a good diet plan, investors should create a plan that sets clear goals, monitors progress, and connects with an outside support group if the do-it-yourself approach isn’t working. If you need help breaking bad habits, don’t be shy about reaching out to a professional financial planner.

Remember, it’s not how much you can make, it’s how much you get to keep.
As anyone who’s tried to shed pounds can attest, the basics are simple to understand, says Pitney, but not easy to achieve. After all, everyone knows how to lose weight by eating healthier and exercising more. Putting that advice into action isn’t always as easy as it sounds. Similarly, says Pitney, “everyone knows that to succeed at investing you need to buy low and sell high, diversify your holdings, and focus on the long term. However, study after study shows us that investors do the opposite and it has cost them dearly.”

Similar to a good diet plan, investors should create a plan that sets clear goals, monitors progress, and connects with an outside support group if the do-it-yourself approach isn’t working. If you need help breaking bad habits, don’t be shy about reaching out to a professional financial planner.

Remember, it’s not how much you can make, it’s how much you get to keep.
Take on a risky investment and you may gain a huge windfall one year, and then promptly lose the same amount the following year. Your friends may have been impressed with that doubling of your money, but in the end your portfolio comes out even. “You wind up gaining nothing,” says Ty J. Young, president and CEO at Atlanta financial services firm Ty J. Young Inc. “In the current environment, we’re recommending that investors cover their downsides by making sure their initial capital outlays are protected against losses. That’s the best way to ensure that you keep as much of your money as you possibly can.”

Worry about what you can control.
Let’s face it. The war in Libya, tsunamis and earthquakes in Japan, and Greek debt riots are beyond your control. Sure they affect the markets, but are they really cause to jump around from one investment opportunity to the next? Young doesn’t think so. “These global issues can profoundly affect your retirement planning and money, but you can’t control them, so don’t even attempt it,” says Young. “Instead, make sure that at least 50% of your assets are protected against losses [if you are 50 years old, or 30% if you are 30, etc.], using vehicles such as FDIC insurance, Treasury bonds, and guaranteed insurance contracts.”