401k investments are investments in the stock market (in case you weren’t aware).
So, these tips apply whether you’re investing in individual stocks, or mutual fund ‘packages’.
- It’s not easy! SERIOUSLY! It’s not easy!
a. Study the S&P500 for quite a while before you invest real money.
b. Study the 20, 50 and 100 day moving average trends.
c. Make many test predictions about what the market will do next. If the outcome is different, try to find out why and learn from it – this is extremely important! If you don’t learn from mistakes, it is extremely likely you will be a careless investor and lose a great deal of money.
d. Carefully study the daily price action. Get a feel for the price action. You’ll notice sometimes it moves swiftly, sometimes it creeps along sooo slowly. Understand why. If you’re short-term trading, slow-trading-price-action can be deadly. If you’re ‘in’ the market and no one is trading (buying or selling) to ‘support’ the current price, there’s a high likeliness that the price can fall. Sometimes, it can fall very quickly!
e. Some investment accounts let you ‘paper-trade’ to get some practice placing orders to buy & sell. In ‘paper-trading’ mode, you are issued a certain amount of ‘fake’ money which you can use to buy & sell investments, exactly as if it were real money. One important difference between paper-trading and real trading is: When you place an order to buy/sell
paper-trading, the order gets executed/filled instantly. When trading real money, a buy order only gets executed/filled when another person is selling at your price. Same with sell orders, they’ll only execute when another person is willing to buy at your price. For this reason, it is possible to place an order to sell (when you’re trying to get out of falling price action) and you cannot actually sell because no one is willing to buy (they know the price is falling). This can be disastrous to your account.
- Decide how much you’re willing to lose.
a. If you’re willing to lose ZERO, then you should NOT invest in the market. Period.
b. If you can decide how much you are willing to lose, you then enable the possibility to grow your money. Willing to lose doesn’t mean you WILL throw it away or lose it, but it is an amount you have carefully decided you are willing to risk, in order to enable the possibility to grow your money. There is no way to invest in the market and not risk the possibility of losing.
- Study the market you want to invest in.
- Study the S&P500 and realize that most stocks move with the same flow as the S&P. It would be wise to study the S&P500 for quite a while before you invest in individual investments.
- Study the individual stock or mutual fund package you’re interested in investing. At the same time, compare it to the S&P500 to notice how the individual stock moves sympathetically (or not) with the S&P500. This is important.
- NEVER ignore or forget about your investments!
- The market can be unpredictable.
a. You may find many reasons to back up your prediction for the direction of an investment, and it can sometimes defy all logic! You must accept that sometimes reasons beyond your knowledge may influence an investment. Being aware of this ‘against-all-logic’ factor, you must always prepare for the possibility.
b. It is extremely difficult to invest in
- Factors that can influence an investment’s direction.
a. Overall market influence. If the overall market is trending good/bad there usually is a sympathetic influence on most other investments.
b. Financial Sector influence. Similar to overall market influence, but Financial Sector specific.
c. Earnings performance/announcements. A company announces past earnings, along with a prediction of their future earnings. An investment can understandably nosedive after announcing good earning along with a poor outlook for future earnings.
b. Leadership changes. Replace a poorly performing CEO, can often have a positive influence on an investment. Losing a seemingly respected CEO, can have a negative influence. These are only 2 examples, but there can be many.
c. Structural changes – businesses merging or splitting.
d. Price adjustments – stock splits (both ways).
e. Float adjustments – adding or subtracting shares open to the public.
- Pre-tax investments vs. Post-tax investments.