18 Important Facts Too Many Investors Still Don’t Understand

INVESTING - ONLINE BROKERS
Investing can get complicated, but keeping important principles in mind can help you navigate your finances.
Updated April 3, 2023
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As an investor, it can be hard to figure out detailed financial products or terms that you may need to know. But there are also plenty of basic but important things you should keep in mind when you’re deciding what to invest in and where you should invest.

Here are a few important rules that can help make some smart money moves on your investment journey.

It’s impossible to time the market

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If only investors could find ways to time the market. Unfortunately, the market is unpredictable and there will always be ups and downs.

Consider taking a measured approach to your investments rather than constantly buying and selling every time the market goes up or takes a dip.

Compounding interest can boost your portfolio

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Compounding interest allows any money you make to potentially be reinvested over and over in things like a retirement fund. Even a little bit of cash invested now could earn you long-term rewards.

You’re not the next Warren Buffett

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Investing success comes from sound decisions over the long term. Instead of judging yourself against someone like Warren Buffett, who is easily one of the greatest investors of all time, keep your eyes on your own investments and figure out what’s best for you.

Index funds are sound investments

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An index fund that tracks stocks in indexes like the Dow Jones Industrial Average or S&P; 500 might make you more money than investing in specific stocks.

In fact, Warren Buffett has suggested that a good place for the average investor to put their money is something as simple as an S&P index fund, particularly one with low costs.

You won’t make it as a day trader

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Day traders who make multiple buys and sells throughout the day may not be making as much as you think. In fact, the majority of them eventually end up losing money.

Remember that like other investors, day traders can make money and lose money. They also have to factor in fees from constant trades as well as potential tax implications that long-term investors might not have to worry about.

Short-term stock declines are normal

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It can be a wild ride watching a market correction cut into your investments but don’t panic sell your portfolio. Occasional corrections are normal. Try to factor in any short-term issues when you’re setting your financial goals if you’re concerned about dips.

Investing isn’t a one-size-fits-all deal

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Some investors may be a few years away from retirement while others may have more long-term goals or want to use their investments for other things. Remember to tailor your investments to your particular needs and goals.

Investments can be taxed

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Selling stocks and other investments or withdrawing from your investment funds could cause you to owe money to the IRS. Review the tax implications of selling shares or taking out investment funds before you make your next investment move.

Saving is not the same as investing

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Investing money means putting it into things like stocks or mutual funds. Money that you want to save should be put into a savings account or other stable financial product.

Your financial portfolio should include a mix of investments and savings, but the percentages in each should be based on your particular financial needs.

Don’t keep your emergency fund in stocks

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It might be a good idea to have an emergency fund on hand for surprise costs like a major home repair or medical bills. The fund should be easy to access and in a stable account like one of the best high-yield savings accounts and not locked away in stock investments.

You might have to pay to invest

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You may be making money on your investments, but you also could be paying fees to fund managers or financial planners. Or perhaps you have to pay transaction fees when you buy or sell stocks. Take these fees into account when you calculate your investment costs.

Remember your goals when taking risks

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Risks have the potential to turn into busts, but they could also pay off big if you make the right gambles. However, you should consider certain conditions when deciding how much risk to take.

It’s easier to recover from a busted risk if you have extra time. On the other hand, you may want to think about taking fewer risks if you’re nearing retirement or cashing out in the near future.

Paying off debt is an investment strategy

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You may be making money on stock investments, but you also could be losing money on any debt on your balance sheet. Debt could come with high-interest rates, so the sooner you pay it down, the more money you’ll free up for investments.

Diversify your portfolio

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It may be easy to get caught up in the hype surrounding a particular stock. Or you may have a good chunk of your investments in shares of your employer. But it may hurt you if you have all of your money in one company that could tank and take your cash with it. A diverse portfolio is a more stable portfolio.

Meme stocks probably won’t make you money

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Meme stocks may be picking up buzz on social media or online communities, but they might not be sound investments. Remember to stick to sound investment strategies instead of following the latest gossip about a trendy stock and do your research before buying a stock.

Don’t set your investments and walk away

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Your investment portfolio needs to be revisited on a regular basis to make sure you’re hitting your particular goals.

Perhaps you may need to rebalance it and make it less risky as you get closer to retirement. You could also take money out of cash reserves to invest in the market depending on your goals. Check in on your portfolio regularly and adjust as needed.

Take advantage of matching funds

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Your employer may offer retirement-fund benefits including matching funds for money taken out of your paycheck and invested in a 401(k) fund. You could be walking away from your company’s money if you don’t take full advantage of these matching funds.

Find out how much your employer may match and try to equal or get close to it to maximize this work benefit.

Basic budgets can make you money

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It’s good to create a monthly budget so you know how much you have to set aside each month for things like rent, utilities, investing, and other expenses. A budget can give you a better grasp of your financial situation. You may be surprised by ways you can save additional money for things like investing.

You can also have different budgets for different needs, such as a budget that only covers your investments, retirement accounts, or everyday expenses.

Pro tip: If you struggle with keeping a budget, this list of the best budgeting apps might help.

Bottom line

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There are plenty of ways to invest in stocks, bonds, mutual funds, or other investments for your financial portfolio. Keeping these basic rules in mind as you decide where to put your money can help reduce your financial stress.

Don’t forget that a portfolio can change over time depending on the market or your personal needs, so don’t be afraid to make adjustments depending on different circumstances.

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Author Details

Jenny Cohen Jenny Cohen is a freelance writer who has covered a bit of everything, from finance to sports to her favorite TV shows. Her work has been featured in The Wall Street Journal, USA Today, and FoxSports.com.

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