You Can Work to Become a Better Investor

We recently observed Labor Day, a holiday to honor all the hard-working people in this country. As one of them, keep in mind that your efforts can have positive results. Famed film producer Samuel Goldwyn once said: “The harder I work, the luckier I get.” And this same philosophy can apply to your investing, too—because you can indeed work to become a better investor.

Consider these steps:

• Work to understand your goals and risk tolerance. Self-knowledge is important in all phases of life—and it’s certainly essential to you when you invest. For one thing, you need to know your goals. How long do you plan to work? What would you like to do when you retire? If you have children, do you expect to help pay for their college educations? You’ll also need to know your risk tolerance to help determine your investment choices. Investors with a high tolerance for risk typically can overlook the day-to-day fluctuations in the financial markets, and may be comfortable investing more aggressively. But those with a low risk tolerance may be more inclined to focus on investments that offer greater preservation of principal, even if this means sacrificing some growth potential.
• Work to learn all you can about your investments. Here’s a bit of advice that will always be valid: Don’t invest in what you don’t understand. The more you know about your investments and what you can expect from them, the less likely that you will be surprised at their performance and their impact on your financial strategy. When you invest in stocks, you hope their value will appreciate over time, but you shouldn’t be shocked over short-term price fluctuations. Conversely, when you purchase a fixed-rate vehicle, such as a Certificate of Deposit (CD), you expect regular interest payments and a return of your principal when the CD matures. But do not anticipate much, if any, growth in the value of your investment.
• Work to develop good investment habits. Developing good habits often pays off. For example, if you exercise regularly, don’t smoke and follow a sensible diet, you will likely help your long-term health. And you can follow good investment habits, too, such as contributing regularly to your 401(k) or other employer-sponsored retirement plan. You’ll also want to avoid bad habits, such as overreacting to a sharp drop in the financial markets. In an effort to cut your losses, you might respond to this downturn by immediately selling investments whose fundamentals are still strong and whose prospects still may be positive.
• Work to get the assistance you need. Investing can be complex, so you may want to work with a financial professional. But investing is just one part of your overall financial picture, so working with an attorney can help with your estate plans. And a tax professional can advise you on the tax-related consequences of various financial moves.

There aren’t many guarantees in the investment world—but the harder you work at becoming a good investor, the better your chances of reaching your ultimate objectives.