Investing successfully in 2015 is easier than you think, you just need to get the basics right. So before you jump in and buy those bargain shares in Woolworths Limited (ASX: WOW), be sure you can tick the following points off your list.
Three of the most simple and time-honoured paths to successful investing are: controlling your emotions, spreading your risk, and letting time make you rich.
You may have come across these before, but given how important they are it makes sense to refresh yourself in 2015.
- Control your emotions
It takes a cool head to navigate the choppy seas of investing, but a cool head is crucial to ensure you are making smart investing decisions and not taking unnecessary risks.
For me, one of the hardest things is holding my nerve against the waves of business news and commentary. No one wants to miss the 'next big thing', but it is important to focus on your long-term goals and stick to your investing plan.
Remember when shares in XERO FPO NZ (ASX: XRO) jumped from $8 to $41 in 12 months? Or last year when shares in Liquefied Natural Gas Ltd (ASX: LNG) surged by almost 1,400%? How about BitCoin? All three generated waves of media coverage and investment hype, as well as the fear of missing out, but many investors will have lost big money when the hype died and shares dropped.
- Spread your risk
Controlling your emotions is easier when you have a limited exposure to one particular company or industry. Spreading your investing dollars around will reduce risk of a catastrophic fall in one or two companies.
The argument that focusing your investing on one area to maximise returns is fraught with risk as an investor has very little control over companies. Santos Ltd (ASX: STO) for example has spectacular production growth prospects in the next five years, but you wouldn't be happy if you had invested your life savings in the company in 2014, only for the price of oil to plummet and the share price to halve.
Instead, consider buying companies which offer diversification such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), which owns shares in several ASX-listed stocks including TPG Telecom Ltd (ASX: TPM).
Another great option is Contango MicroCap Limited (ASX: CTN) which owns a basket of hand-picked small-cap companies. Its investment portfolio has returned on average 16.9% per annum over the last 10 years and, with the current low borrowing costs, the environment for growth should continue.
- Let time make you rich
The third element to master your wealth in 2015 is to allow time, and lots of it! The longer your investing horizon, more powerful the effects of compounding and the bigger your wealth can grow.
Having time on your side also allows you to control your emotions through periods of volatility. Knowing that you are in for the long-haul lets you work through the (inevitable) difficult times and focus on taking advantage of falling prices.
