If you were given $100,000 to invest in the stock market how do you think you would fare? Would you be confused or hesitant with what to do with the money? Would you know which companies you would want to invest in? Do you think you would ace the art of investing and make big bucks…Or would you crash and burn?
Over the past 10 months, the fellows at El Pomar Foundation were given $100,000 and the opportunity to answer these questions through hands-on experience. Now, the money was fake and the investing took place through an online Marketwatch investment game but, trust me, the emotional highs and lows of “real” investing were ever present among the fellows.
The game was all part of a monthly course called Investment Challenge, taught to all fellows and led by El Pomar’s President/Chief Investment Officer and Trustee R. Thayer Tutt, Jr. The goal of the course is to educate fellows about the fundamentals of finance and investing, while also covering personal finance milestones that will arise in the future, such as purchasing real estate and saving for retirement.
With the recent conclusion of Investment Challenge, we asked Tutt to share a few tips for the novice investor ready to jump in with real money. Here are his four tips:
- Understand your time horizon. Are you looking to invest for the long-term or short-term? Are you saving for retirement in 20 years or to go to grad school in two years? Identifying what your goal is and the milestones along your investment timeline will help you find your investing style and select appropriate investment vehicles.
- Recognize your objectives. It is essential to understand the fundamentals of finance. This includes learning the difference between stock, bond, and mutual fund investment vehicles and between bear and bull markets. Additionally, it is important to learn what kind of investor you are. Are you hands-on and aggressive or more likely to hire a money manager and conservative? Learning these traits about yourself is important, so test the waters. Tutt adds that if you go to bed at night worrying about your investments, you need to take a step back and reduce your risk.
- Have a good sell discipline. A good investor is not defined by the home runs he or she hits but by his or her strikeouts. Making sure that you set rules for yourself on when to sell is important to keeping a healthy portfolio. Let go of the stock that has lost you 20 percent and continues to decline, and don’t get greedy when a high performing stock seems to keep rising and you want to hold onto it for just a little while longer. Set rules for yourself and follow them, and remember: buy low, sell high. This probably means you don’t want to buy a company at its all-time high unless there is a very compelling reason.
- Diversify your portfolio. Try not to “put all of your eggs in one basket,” as the saying goes. Balance your portfolio with stocks, bonds, and mutual funds that have differing levels of risk and that do not completely correlate with one another. For example, don’t buy just one stock or a collection of investment vehicles all focused on one industry or that are all affected similarly during market cycles.