10 Fundamental Steps Before You Win In The Stock Market

Stocks and shares for the long run

Stocks and shares should form a significant proportion of the portfolio of the long term investor.

The evidence for the out-performance of  stocks and shares over bonds and cash in the long term is well established – read my blog.

Before you invest.....

Before investing in the stock market, there are fundamental steps you should take to establish a solid personal and financial foundation.

I have listed 10 of them below.

Fundamental steps before investing in stocks and shares

1. ESTABLISH YOUR FINANCIAL GOALS

  • What are your financial goals?
  • Are your goals short term or long term?
  • If your goals are short term like saving for a holiday, buying a car or a house, then save in an accessible cash account.
  • If however you have long term goals of over 5 years, then consider the stock market either through individual stocks and shares or investment funds.
  • Long term goals include saving into a pension plan, buying a second home or saving for university/college fees.

2. BUILD CASH RESERVES

  • Financial emergencies are inevitable in life – for example replacing a faulty washing machine, car repairs,
  • Therefore before you start investing, build up cash savings.
  • This will prevent you selling your investments to meet these unexpected needs.
  • Build up an emergency fund equivalent to 6-8 months of your expenses.
  • Many USA households have less than $1000 in savings.
  • A UK survey of 1000 households showed 20% had no savings. 12% had savings of less than £250. There are over 8 million people in this position.

3. MONITOR YOUR PERSONAL EXPENSES

  • Keep track of your personal expenses.
  • Review your expenses regularly to see where you can make savings.
  • Do you need to buy that expensive cup of coffee daily?
  • Can you make your own packed lunch instead of buying the expensive sandwich at work?
  • Invest your savings!!
  • Use a Personal Expenses Template like the Google template.

4. LEARN TO SAVE AND INVEST

  • Spend less than you earn.
  • Avoid “Lifestyle Creep” – increasing your standard of living in order to match your increased income.
  • Develop the habit of delayed gratification.
  • Aim for financial independence & security.
  • Save at least 10% of your income. The average is currently only 1.7%
  • Save regularly. Set up automatic monthly transfer from your checking or current account into your savings account.
  • Start investing early to employ the power of compounding.
  • “Those who understand compound interest earn it and those who don’t pay it”.

5. CALCULATE YOUR NET WORTH

  • Establish a personal balance sheet.
  • Calculate all your assets and liabilities .
  • Establish your financial or economic net worth.
  • Increase your net worth by either increasing your assets and income or by reducing your liabilities.
  • Aim to move from a position of negative net worth to zero and into positive wealth.
  • Link to Google template.

6. PAY OFF YOUR DEBT

  • Do you have debts on store cards, credit cards, loans and overdrafts?
  • Do you know how much interest payments you make monthly?
  • How much leverage and debt does your household have?
  • Reduce your liabilities by paying off your debt.
  • Move into positive wealth.
FREE PDF Download '10 Fundamental Steps Before You Invest In Stocks'

Foundation principles for successful long term investment in stocks and shares.

7. BUY LIFE INSURANCE

  • Protect yourself and your family from unexpected loss of income from serious illness, injury, disability or death.
  • Determine your financial risks from loss of income and insure to cover them – for example children’s education costs.
  • A Family Income Benefit policy pays a monthly income.
  • Some policies pay a lump sum.
  • A Life Insurance policy is a very crucial component of financial planning!

8. BUY A HOUSE

  • A house is probably the most prudent investment most people will make.
  • Consider saving to purchase a house before investing in the stock market.
  • A mortgage provides significant leverage. For example, if the price of a property on which you put down a 15% deposit increases in value by 5%, the return on your investment is 33%.
  • Human behaviour means houses are bought as a long-term investment and can generate appreciable wealth.

9. KNOW YOUR RISK TOLERANCE

  • Be aware of yourself, your attitude to risk and your psychology.
  • If you prefer low risk investments then save in a cash account.
  • Stocks and shares outperform cash in the long term. In the short term they can be volatile and you may lose money.
  • To invest in stocks and shares, you should have a horizon of more than 5 years.
  • Do not invest money you are likely to need at short notice.
  • You need PATIENCE, to be a successful investor.

10. LEARN HOW TO INVEST

  • Read, read and read!!
  • Learn how to read and understand company financial accounts, financial numbers and ratios.
  • Learn how to evaluate and screen individual companies for investment.
  • Learn how to write a one-page investment thesis for each stock you buy – read my blog on how to write an investment thesis.
  • Master the principles and processes behind building a long-term portfolio of stocks and shares.
  • My book, “The Smart & Common Sense Investor”, is a constellation of the principles of long term investment in stocks and shares.
  • The principles of long term investment are simple  but require hard work and dedication to master.
  • Invest in yourself to learn and understand them.
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Chinedu Chiana

Chinedu Chiana is an Investor, Entrepreneur, Business & Financial Coach and Author of 'The Smart & Common Sense Investor'. He helps business owners with skills and strategies to create, build and grow profitable online businesses particularly with funnels, social media & email marketing, business automation and marketing advice.