4 Investment Tips For Millennials Who Want To Be Stock Market Savvy
In considering the wealthiest people who ever lived, you're likely to find several common traits among them. One of those traits is that many created their wealth from owning and investing in companies.
In fact, I don't know of one wealthy person who created his or her wealth from simply saving a monthly paycheck. It is simply not possible to create wealth solely from saving, especially when inflation is on the rise.
Despite being very rewarding, the world of investing seems complicated and challenging. As a result, too many Millennials tend to shy away from the place where the wealthy get wealthier.
Here are four tips for Millennials to to use and invest successfully:
1. Never Let Your Emotions Influence Your Decisions
The most successful investor of all time, Warren Buffet, says that successfully investing over a lifetime does not require stratospheric IQ, unusual business insight or inside information.
It only requires a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.
My framework states that in order to diversify my risk, I should not put more than 25 percent of my net worth in any one sector. This mentality does not only apply to investing, but also to life.
When you make decisions based on your ever-changing emotions, you may end up doing something stupid. When you make decisions based on principles and standards, your decision-making process will no longer be arbitrary.
2. Invest In Yield-Producing Assets
The 2008 stock market crash wiped out several people, many of whom did not see any return on their investments. This is because they chose to invest in assets that only appreciated and had no yield.
When I invest, I don't care about what is fashionable; I invest based on my framework.
Investing in yield-producing securities (securities that produce some form of regular income, such as dividends and interest) compensates the investor, while his or her capital appreciates.
Millennials can generate another stream of income if they invest in dividend-paying stocks and high-interest bonds.
What I love most about investing in dividend-paying stocks is that the managers of the company must constantly ask themselves where they are supposed to generate income to distribute to the shareholders.
This keeps them diligent and focused on increasing the company's revenue.
3. Prudently Use External Capital
Another common practice among the wealthy is the use of other people's money to create wealth. When Warren Buffet started his career, he created investment partnerships and had people put money into a fund that he managed.
He would then charge investors 20 percent of the profits he created for them. This is an example of how he used other people's money to create an income stream for himself.
Jamaican billionaire Michael Lee-Chin is another example of how using external capital can create wealth. He borrowed $500,000 to invest in a financial services company that he thought would grow.
Seven years after that, $500,000 appreciated to $3,500,000.
4. When Investing, Think Long Term
Investing is all about taking calculated risks, not wild gambles. People who buy stock in a company they have not researched thoroughly do not invest, they speculate. The hallmark of investing is understanding what you own.
You will be much better off in the long run when you invest in a company because you think it is an excellent business that will steadily grow in the long run and while it grows, will pay a reasonable dividend.
Don't invest in a company because you think the price of the stock will increase in a few minutes, weeks or months.
Photo Courtesy: 20th Century Fox/Wall Street: Money Never Sleeps
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