How To Avoid Mistakes When Investing In Shares

The promise of making a lot of money has been heard by many, and many have found out that it just is not as easy as they had heard. They lost money - sometimes a lot of it. They then turned away from the stock market and ended up totally disillusioned about it. The truth is, they may have been somewhat confused about it in the first place. They may have thought it would come to them just like it did to others - without knowing the why’s or the how’s. Here are some strategies that you can use in order to help you to avoid the common mistakes that others have made.

Get A Realistic View

By looking at the market with your eyes open, you can come to understand not only the profit possibilities, but also the possibility of losses. The truth is that the higher the possible gain there is, that it is always associated with the increased likelihood of loss. The safer investments always bring a lower level of profit, and the safest investments have attached to them the lowest levels of profit.

Understand The Market

One of the greatest benefits that you can have to help you avoid a lot of potential pitfalls in your investments is to understand the principles of investing. In other words, read all you can about the process, how to judge a good stock, etc. The more you know about it yourself, the wiser you will be able to invest your funds - and hopefully see a profit. You will also be able to develop a worthwhile investment strategy - both for the short term and for the long term.

It is usually a good idea to diversify into more than just the stock market - at least until you really understand what you are doing.

Diversify

It is smart investing to place your available investment funds into a minimum of 6 different kinds of shares. Some suggest that you go as many as 20 in order to diversify safely. Spread your investments into different kinds of stock (sectors) that are not related. This way if one type of market does not do well, then the other ones should. This enables you to still make money from some of your investment.

The smart investor will take a portion of their investment money and put a percentage of it into secure investments like trust funds which are solid investments, and possibly also bonds, which are the most secure, but do provide less interest.

Seek Counsel From Professionals

Unless you have money to just throw away, it would be a real good idea to seek help from someone who understands the market better than you do. There are professionals out there, financial advisors, brokers, etc., that are more than willing to help you build a solid portfolio for your investments. Their expertise can spare you a lot of unnecessary loss, and get you on to the right track to some solid profit.

Make Your Investments For The Long Term

While there is different thinking about the markets and how to invest, the general idea is to make your investments for the long term. Experienced stock market experts tend not to watch the market everyday, but only check on it once a month and many of them only quarterly. Watching it everyday leads to a lot of anxiety - since the market normally fluctuates a lot from day to day. Overall, though, it generally moves upward.

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Tax Smart Investing Strategy

Tax smart investing strategy means utilizing tax laws with stocks to obtain optimum investment results.

Long term investors face a dilemma that short term investors do not in that long term capital losses do not receive as favorable treatment as do short term losses.

All too often, investors buy stocks, put them away, and forget about them...until it's too late!

When they see their stocks down in value, they tell themselves, "Don't worry, it'll come back." My favorite definition of a long term investment is a short term trade that didn't work out!

The hallmark of the unsuccessful investor is the inability to take a loss. To them, taking a loss is the same as admitting to being wrong...'losing face'. They'd rather lose money! Unless they get by that barrier, they have no hope of being successful.

And the truth is, by using this tax smart investing strategy, they can enjoy the advantage of receiving both short term capital loss tax treatment for their losses and continue to hold their stocks for long term appreciation.

The maneuver you're about to learn, tax smart investing strategy, is similar in theory to how retail establishments treat their merchandise inventory at year end. It's called an inventory write-down.

Retailers, being a business, frequently adjust downward the value of unsold, or slow moving, merchandise and charge off the write-down as a business expense.

The net result is lower taxes owed while still holding the inventory for future sale.

Investors, not being a business, can't merely write-down the value of their stocks. They actually have to sell to establish a loss. Then buy them back.

However, there is a tax rule called a 'wash sale' which comes into play whenever an investor takes a loss and wants to buy back the stock to establish a lower basis.

The wash sale rule states that, in order to take a tax loss, replacement shares cannot be purchased either 30 days before or 30 days after the date of the loss transaction.

If replacement shares are purchased within those 30 days the loss cannot be taken on that years' tax return but instead must be added to the cost of the replacement shares which steps up the basis which defeats the purpose of the entire transaction.

This leaves the investor with a dilemma. What if, while the investor is sitting on the sidelines sweating out the 30 day waiting period, the shares start to rise?

If you thought of buying a call option to keep the stock from getting away from you, that won't work either.

If you thought of buying shares of a company in the same industry, that is allowed. But what if you aren't interested in the other company? That would mean extra trades and commissions. That's not utilizing tax smart investing strategy to its best advantage.

The best solution, in my opinion, is to first buy the replacement shares at least 31 days prior to the original shares going long term. Then, 31 days later, sell the original shares establishing a short term capital loss for the current year and leaving the investor with the same number of shares as before but with a lower cost basis.

Note that, although the investor is holding twice as much stock for 30 days, this is not the same as averaging down where the investor intends to hold on to both positions.

This tax smart investing strategy not only allows investors to hold shares in favored companies but also to maximize the significant tax advantages present.

As always, consult with a professional tax consultant before entering any taxable event.

Because No One Cares More About Your Money Than You

http://dynamic-stock-market-strategies.com

Good trading, Don Heggen

Investing - Rebalancing Your Portfolio

The developments in the equity market over the past six months and the many reports on the economic and investing outlook for the year ahead may prompt some of you to consider rebalancing your portfolios.

When you rebalance your portfolio, you're reviewing it to determine if your asset allocation is still intact. Normally, the asset mix would change through time due to the returns made on the different asset classes in the portfolio. Therefore, you will need to make adjustments, which are buy and sell different assets in order to restore it to its original allocation to keep your portfolio in line with your investment objectives.

For instance, you invested 50% of your portfolio in an index linked fund and the other half in a fixed income fund. Within a year or two of making your investments, the stock market picks up high. As a result, your index linked fund investment grows and takes up a bigger proportion of your portfolio. In the same timeframe, your bond fund investment registers only minimal growth.

Therefore, the asset allocation of your portfolio has changed from its original mix; from a balanced portfolio, which is 50% equity and 50% bonds, it has become a more aggressive portfolio like 70% equity and 30% bonds. It may no longer be in line with your risk tolerance and you could be in danger of not meeting your investment goals.

Another advantage of rebalancing is that it enables you to lock in the gains made on growing investments and buying other assets at a cheaper price.

It's crucial to periodically reassess your portfolio's asset allocation and there are many different thoughts out there on how often you should do so. The most common practice is to rebalance your portfolio on an annual basis. If you practice strategic asset allocation where you maintain a certain allocation to an asset class, experts say you should not rebalance too often. A common timeframe would be at least a year, if not two or three.

There are also many different opinions on the start point at which one should rebalance one's portfolio. Generally, the rule of thumb is that you should not rebalance a portfolio that has a 10% or less deviation from your original asset allocation.

Moreover, one of the most important considerations when rebalancing your portfolio is the benefits versus the costs. Always remember that when you rebalance a portfolio of unit trust funds, you will incur transaction costs in the form of upfront service fees and also exit fees. Some fund companies offer a limited number of free switches when you transfer assets from one fund to another within the same company, but in some cases, sales charges or front-end fees may still apply. For example, if you switch from a no-load bond fund to an equity fund, you may have to pay the upfront fee and once you have used up your free switches, you will incur a switching fee.

Thus, when considering a rebalance of your portfolio, it pays to remember that unit trust funds are meant to be medium to long-term investments. Therefore, while you shouldn't invest and forget about them, don't rebalance just for the sake of trying to time the market. If you do so, you will be practicing rebalancing for the wrong reasons and you could end up switching too often and incurring costs that will eat into your returns.

Rebalancing is not about timing the market; instead, it is about monitoring your investment and making adjustments, only if necessary in order to ensure that it is in line with meeting your investment goals.

Michael Russell Your Independent guide to Investing

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