Tips to Become a Prudent Investor
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson
Patience is the number one attribute of a prudent investor as no investments can guarantee fast profit. Moreover, value of investments typically fluctuates widely over the short term. Prudent investors typically look for long term rewards rather than short term gains.
Don’t Allow Emotions to Control Your Investment Decisions
“Temperament costs investors more than ignorance.”
“Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett.
Be rational and do not bring your emotions into your investments. This would include being cautious on over-performing investments and investing while others are trapped in their pessimism. Emotions like fear and greed can make you engage in negative behaviours and reduces your ability to grow wealth. Every investment decisions you make must be backed by research and facts and not by “gut feelings”.
Know the Market
“An investment in knowledge always pays the best interest” – Benjamin Franklin.
In order to be a prudent investor you need to educate yourself and learn about the market. Without proper knowledge on what you are spending your hard-earned money on, it is like playing poker without looking at the cards.
Understand & Accept the Risk
“Risk is what an entrepreneur eats for breakfast. It’s what she slips into bed with at night. If you have no appetite for this stuff, or no ability to digest it, then get out of the game right now.” – Heather Robertson
Acknowledge that in all investments, there will always be a period of market uncertainty, short term under-performance and crisis. Ask yourself “how much money you are ready to lose” rather than “how much you want to earn” before you invest. Take steps to minimise potential loses e.g. by diversifying your investments and be prepared mentally that sometimes market trend can be suddenly turn against you.