Investing has the power to make you a millionaire, but it can also cost you your savings if you're not careful. Some people choose to avoid the risk by not investing at all, but this brings its own set of troubles. Without investing, your dollars will barely grow in a bank account, and you'll have to set aside more money every month to reach your long-term goals.
A better approach is to learn how to invest wisely to minimize your risk of loss. Here are three investing tips that ultimately separate rich investors from poor ones.
1. Rich investors know how to be patient
It is possible to become rich overnight with investing, but if that's your goal, you may as well buy a lottery ticket. You have to buy in and sell at just the right time, and that mostly comes down to luck. More than likely, you'll end up losing most of what you "invest" this way.
Successful investors understand that they need to take a long-term view. They focus on finding strong companies they believe will still be at the forefront of their industries in a decade or two. They tend to be a little more skeptical of companies that haven't been around long enough to prove themselves yet.
Investing this way usually doesn't lead to massive overnight gains, but over several years, you see stock prices trend slowly and steadily upward. There might be some short-term losses, but these usually aren't a problem for those who are investing for the long term.
2. Rich investors don't put all their eggs in one basket
Investors trying to get rich quickly often pour a lot of money into a single company in the hope that it will make them a lot of money if the share price goes up. But what many don't think about is that the share price could just as easily fall, and then they could lose most of their money.
Diversification -- spreading your money around between many different investments -- doesn't eliminate the risk of loss, but it makes significant losses much less likely. If you have $100,000 invested in one stock and it falls by 50%, that's going to cost you $50,000. But if you have $100,000 invested equally in 100 different stocks and one of them falls by 50%, you're only out $500. If you have other stocks that are doing well, you may not notice that $500 loss at all.
You should spread your money around between at least 25 different stocks. Ideally, these stocks should be in a few different industries too. That way, if there's a major issue affecting a whole industry -- like a pandemic disrupting travel and tourism, for example -- you won't see all your stocks plummet.
One of the simplest ways to diversify your money is to invest in an index fund. These are bundles of investments you purchase as a package, and they often contain hundreds of stocks. S&P 500 index funds, for example, contain all 500 stocks that appear in the S&P 500 index. Over time, these funds have historically delivered strong returns, and they're pretty affordable to own, too. Even if you have a $100,000 portfolio, you'll probably pay less than $100 per year in fees if you invest it in an index fund.
3. Rich investors don't let their emotions get in the way
Money can stir up a lot of emotions. Seeing your stocks soar might encourage you to buy more in the hope of increasing your gains, while watching your stocks fall might make you want to sell immediately to prevent further losses. Sometimes, buying more of a stock or selling a stock is a smart decision, but it's not one you should make based on emotion alone.
Ups and downs are a natural part of investing, and even the richest investors sometimes lose money. The difference between them and less successful investors is that the rich investors don't get too upset by these short-term changes.
Instead, they look to the bigger picture for signs about what to do next. If they see a company steadily losing market share to a competitor, they'll probably sell their shares. But they're not going to sell shares if a profitable company has a bad quarter. They understand that every company has its good quarters and bad quarters. Over the long term, the stock market tends to go up.
It might seem deceptively simple, but if you follow the three tips listed above, you can grow your wealth substantially over time. If you're new, start small and invest more as you gain confidence in yourself. Treat losses as a learning experience and always keep the long term in mind.