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The stock market is an unforgiving beast. It can reward those who do their homework, and take remorselessly from those who blindly throw it money. Countless millions of investors feel they have the investing prowess to go against some of Wall Street's finest, only to eventually take it on the chin. It'd be foolish to think that you'll be successful all of the time, but I do have ten methods you can follow that should make you a better investor.
1. Avoid pack mentality
This might sound like a no-brainer, but it pays to think for yourself. Don't get me wrong -- it never hurts to pay attention when Warren Buffett tells you what he's buying, or take notes when David Einhorn tells you what's on his short list. But marching to the beat of your own drum could mean the difference between huge returns or hefty losses. Just because Sirius XM (Nasdaq: SIRI ) is a popular play, doesn't mean it makes for a good investment. Sirius's technology might be found in many new cars, but I question how it will pay off more than $3 billion in debt when it has thus far struggled to maintain profitability.
2. Know your horizon
The next step is to establish your investment time horizon. Younger investors will have numerous decades to accumulate wealth, while baby boomers are preparing to live off their retirement nest egg. Knowing whether you're an active trader or a long-term investor is essential if you want to make your investing strategy as effective as possible.
3. Know your limits
Understand what level of risk you're willing to tolerate. For instance, Tesla Motors (Nasdaq: TSLA ) has proven clean-energy technology. But the company has been unprofitable so far, and it has more questions than answers. Given that it's likely to be volatile in the years to come, I wouldn't recommend the stock to a baby boomer nearing retirement. But younger investors might want to be more aggressive, since time is on their side.
4. Understand what you own
It's imperative that you not only understand what the companies you own do, but why you bought them in the first place. For instance, I definitely wouldn't put any of my own money into shares of Krispy Kreme (NYSE: KKD ) , even though I'm a big fan of their donuts. Krispy Kreme doomed itself by expanding beyond its financial means in 2004, and it's shuttered numerous stores in light of its crippling debt. The lesson: Don't just invest in what you know. Pick growing businesses in which to invest your hard-earned cash.
5. Accept that you're not perfect
This is absolutely the toughest suggestion to take to heart, because even I sometimes refuse to admit defeat, but minimizing your losses needs to go hand-in-hand with maximizing your gains. One of the worst losses I took came in August 2009, when I bet against the SPDR S&P 500 (NYSE: SPY ) . It rallied along with the rest of the market, and it's now 90% above its 2009 lows. I continued to ride that loss upward, despite improving economic news. Remember not to let portfolio potholes become sinkholes.
6. Invest in increments
Once you've found that perfect company, remember to edge your toes into the water before you jump in headfirst. Investing in increments removes most of the "all-or-nothing" emotion, and keeps you from adding to losers which can burn a hole in your pocket. As an example, integrating streaming media with its traditional DVD mailing business took Netflix (Nasdaq: NFLX ) years to accomplish, but its subsequent soaring subscriber growth has rewarded long-term shareholders with triple-digit gains.
7. Stop paying Uncle Sam
Although this may not always work perfectly, it pays to keep track of when you buy and sell stock. Short-term capital gains taxes can be as unpleasant as 35% for those in the highest tax bracket, while long-term capital gains taxes never eclipse 15% across any tax bracket. In the end, a profit is a profit, so you shouldn't hesitate to lock in gains. But taking your investment horizon and goals into account should help to determine whether holding for a longer duration might indeed save you money.
8. Pay yourself instead
Instead of giving your money to Uncle Sam, put it to work in companies that will pay you. Consumer giant Clorox (NYSE: CLX ) has dozens of popular brands in its portfolio, including Glad and Brita, that provide financial stability during rough economic times. It also has a rock-solid dividend yielding 3.4%, which has provided dependable income over the years. Dividend-paying stocks have historically outperformed those which don't pay a dividend, so why not give yourself a raise?
9. Set clear goals
Sure, we'd all like a billion dollars, but setting clear and reachable expectations from our stock picks can help us determine the best time to sell. Often, when I'm purchasing a stock, I have a set level at which I aim to take profits. This level can change as the fundamentals of the stock change, but I always have a sell target in mind. So should you.
10. Invest in yourself
Some view paying for books or financial newsletters as a sign of weakness. On the contrary, investing in yourself is the smartest move you can make. The stock market is really just a never-ending sea of data that needs deciphering, and you shouldn't shortchange yourself when it comes to your retirement.
Is there something that you feel makes you a better investor that I've left out? Feel free to add your thoughts in the comments section!