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, Online Entrepreneur, Business & Financial Coach and Author of 'The Smart & Common Sense Investor'. He helps educate business owners and entrepreneurs on the skills and strategies to create, build and grow profitable online businesses. He reviews business software and digital marketing educational courses covering funnels, social media & email marketing, productivity, business automation and marketing advice.