How You Can Become a Better Investor
Aug 22nd 2011 12:34PM
Updated Aug 22nd 2011 12:36PM
Investing is easy to learn, but it takes a lifetime to master. Whether you've just started trying to figure out what to do with your money, or you've invested successfully for decades, you can always learn something by going back to the basics of investing strategy. What you learn will make you an even better investor.
A crazy-complicated world
Now more than ever, you need all the help you can get with your investing. Wherever you turn these days, you'll face a flotilla of investment-related innovations that financial institutions have come out with in recent years. You may have more choices than ever when it comes to deciding where to put your money, but you also have to figure out which of those investments are lemons, and which will potentially make you rich.
A couple of decades ago, most investors fell into two categories. Beginning investors stuck with mutual funds for their low minimum investment requirements and quick diversification. More sophisticated investors chose to invest in individual stocks.
Nowadays, you have so many more choices at your fingertips. Exchange-traded funds give you lightning-quick exposure to a wide range of stock, bond, commodity, and other financial markets. Trading futures and options is now as easy through discount brokers as trading stocks. You can buy stocks on international markets around the world, from many of the same brokers that sell you U.S. stocks.
To cull those choices down, the Motley Fool is calling on several of its contributors over the next few weeks to show you some successful strategies you can use to invest better. From focusing on dividend stocks to successful mutual fund and ETF investing, from finding value in beaten-down companies to becoming a sophisticated options trader, you'll get the basic information you need to build your knowledge base.
The biggest lesson you need right now
Today, though, the question on everyone's mind is how to defend your portfolio from losses. With stock markets heading downward over the past month, no one wants to see their net worth plummet through a bear market.
The past decade offers a couple of different perspectives on portfolio protection. The bear market that ran from 2000 to 2002 showed the importance of keeping a diversified portfolio, rather than chasing performance. Across the board, tech stocks that had soared during the boom times of the 1990s got hammered, with priceline.com (NAS: PCLN) , JDS Uniphase (NAS: JDSU) , and Corning (NYS: GLW) all losing 90% or more of their stock value between the beginning of 2000 and the end of 2002. But many old-economy stocks that investors had left for dead soared, with Altria (NYS: MO) and Lockheed Martin (NYS: LMT) more than doubling in the same timeframe.
The market meltdown of 2008 and early 2009 gave investors a much bigger challenge. Stocks in nearly every sector fell in tandem, and finding refuge was nearly impossible. The only industry with strong gains during that bear market was deep-discount retail, where Family Dollar (NYS: FDO) and Ross Stores (NAS: ROST) posted double-digit percentage gains.
What both bear markets have in common, though, is that staying with a solid investment strategy during and after those rough patches served investors well. It was hard to own anything but tech stocks during the rise of the 1990s, but it saved disciplined investors from huge losses in the tech bust. And although many were tempted to sell out at the early 2009 market bottom, those who held on recovered much of their losses.
Many people are convinced that investing is a rigged game. But all it takes to get a big edge over the average investor is some basic knowledge. Follow the Fool over the next several weeks, and we'll deliver the education you need to succeed!
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.
At the time this article was published Fool contributor Dan Caplinger thinks we've all gotten quite an education over the past few years. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Altria Group and Lockheed Martin. Motley Fool newsletter services have recommended buying shares of priceline.com and Corning. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy educates you.
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