Success in investing takes time, and for that reason a lot of people tend to rush into it.
There comes a point in life—either you determine you’re old enough to start investing or you find you have the income to support it for the first time—when you may feel the need to simply dive in.
For the most part, this is a healthy outlook. It does take time to succeed in all but the very luckiest of cases, and the sooner you put some money into the market of your choice and start gaining experience, the better.
However, no matter what your situation is, it’s still more important to be prepared than to get in quickly.
Keeping that in mind, here are four things to consider doing before you ever put money into a stock market or other investment.
#1 Pay Down Debts
There’s actually a lot of debate you can find as to whether it’s wiser to go ahead and start investing or pay off debts first. One thorough discussion on this question raised a very interesting point of compounding interest vs. your credit score.
The idea is that interest essentially works both ways. If you invest early, you enjoy the compounding interest of those investments over time, but you also get stuck with paying high interest rates on your debts.
Meanwhile if you pay debts first you avoid interest accruing on those debts over time, but you delay your investment and thus reduce your own benefit from compounding interest. It’s a double-edged sword.
However, the fact that a delayed or defaulted debt payment can damage your credit score may tip the scales in favor of addressing the debt first. Ultimately, you’re relieving yourself of a financial burden that gets worse over time, and freeing yourself to invest without regrets.
#2 Consider Your Habits
There’s a lot of specific strategizing that goes into building an investment portfolio, but before you get into any of the financial questions, it’s important to do some introspective thinking.
One set of tips on successful investing referred to the idea as understanding your own trading personality. Essentially, it means figuring out what kind of trader your habits and personality will allow you to be. Here are a few questions you should consider…
- Are you glued to the computer all day, or are you too busy to be that attentive to your investments?
- Do you tend to be a high-risk or risk-averse person?
- What kind of trading actually appeals to you?
These are all questions about your own preferences and tendencies, rather than any financial specifics. Figuring out the honest answers will set you up for success.
#3 Plan A Diversification Strategy
When you’ve considered your own habits and your own financial situation, you’ll need to start strategizing for your actual investments.
In part this means getting to know market patterns and keeping an eye on specific companies or industries you may have an interest in. However, there are also some more general considerations at hand.
One article on pre-investment strategies made a point of emphasizing diversification as an early initiative, and this idea has been backed up by most every investing expert out there.
Spreading out your finances between a variety of assets decreases the likelihood of a net loss, whereas putting too much money into a single venture is significantly riskier.
The concept is fairly simple to understand, but you’ll find as you set about launching your portfolio that strategic diversification actually takes a lot of preparation.
#4 Study Up
Finally, for a more general tip, get busy educating yourself. Read books and articles for beginner investors, talk to friends (or experts, if you know any) with stock market experience, and then do it all over again.
These days you can also take advantage of a number of apps and online programs designed to simulate stock market scenarios for training purposes.
At some point you do need to dive into the actual market and see how you do, but a strong foundation is extremely important. Study up until you think you’re prepared to invest, and then keep studying for a while longer.
You never stop learning as an investor, but it helps to get a significant jump-start.
Naturally there’s more to consider, and within each of these tips there are several steps to take. The process is different for each individual.
But if you happen to be considering opening a portfolio, addressing all of these ideas first will put you in the best position to succeed.
So what tips could you share on things you should do before you start investing? Share your thoughts and comments below.