Smart investing: learn to trade smarter

Anyone can invest, but can everyone trade smartly? In this article we look at how you  can  invest smarter and how you can get a better return on your investments.  By following the tips in this guide, you will get the best results from your trades: even when you have little money left to invest.

When is it smart to invest?

The answer to this question is surprisingly simple: today! It is much more expensive not to invest in the long term. Historically, you achieve a higher return on investments in shares than on your savings. On average, the annual return on shares is around 7 percent, while the return on your savings is now negative.

Do you have an amount of money every month that you do not immediately need? Then it may be interesting to invest with this money. It is important to do this in a smart way. In this article we discuss the 10 basic rules for the smart trader.

Invest periodically: why is it so powerful?

Before we dive into the 10 basic rules for the smart investor, we will show why is wise to invest now. If you invest an equal amount periodically and invest it repeatedly, you can build up a huge return over a longer period. Let us say you invest $1000 a year at a return of 7%, then you have:

  • $14,783 over the course of 10 years.
  • $43,865 over the course of 20 years.
  • $101,073 over the course of 30 years.

As you can see, your money is increasing much faster than the amounts you put in. In 10 years you achieve a return of $4,783, while in 30 years you have achieved more than $70,000 in returns. The time period is three times longer, but your return is more than 14 times higher. But how did this happen?

This is due to the principle of exponential growth. Einstein did not call exponential interest the eighth wonder of the world for nothing. When you start with an investment of $1000 and you reinvest your return, you will receive 7 percent over the next year over the $1,000, but also on the return of $7. If you stick to this year after year, the amount you own can grow enormously. For example, after 60 years, with a monthly deposit of $1,000, you would already own $870,466.

Smart trading can therefore make you a lot of money. If you put enough aside, anyone can eventually become a millionaire. However, this is not always possible. Let us see how you make sure you achieve the results of a smart investor as well!

smart investing tips

10 basic rules for the smart investor

Rule 1: invest cheaply

Many people underestimate the importance of trading cost. They are smart because they invest, but at the same time unwise by doing so with an expensive broker. It is possible to invest at your bank. This is unwise in almost all cases. Your bank charges a high percentage of costs over each transaction. They can do this because they know that many people are naturally quite lazy. People who have already opened a bank account when they were young are now opening an investment account with that bank.

On paper, a small cost difference of 0.5% seems limited. However, this can add up considerably in the long run. If you invest €1,000 monthly over a 30-year period at a return of 7%, you get a positive result of $101,073. A cost percentage of 0.5% brings the return down to 6.5%. In this case, your final result is $91,989.23.

A cost percentage of 0.5% ensures that you end up getting 10% less return! Fortunately, there are plenty of cheap and high-quality brokers where you can invest at low cost. Some providers even offer trading without any commissions. Do you want to know where you can invest the cheapest? Read our article on cheap investing and discover how you can save money today:

cheap investing

Rule 2: Spread your chances

When you go to the casino for an evening, you normally do not put your full amount directly on red. The evening could just be over soon. Still, many first-time investors do bet all their money on one colour when they start investing. They love a company and put all their money into that business. That's a shame! When the company is not doing well, you immediately lose your entire deposit.

Smart traders therefore spread their investments sufficiently across different investment products  and  regions. Depending on your risk appetite, you may choose to diversify your investments between shares and bonds. By diversifying, you can achieve good results within any economic climate. If you want to get a good result in the short term, you can decide to put some of your money into derivatives.  

It is also important to spread your investments sufficiently across different regions. In the past, there were certain regions that performed poorly for a longer period of time. A good example of this is Japan. For more than 20 years, this economy has suffered from sharp price falls. An investment in this region would therefore have underperformed.

If you do not fully spread your chances, you are more likely to be gambling. Therefore, be a smart investor and spread your chances. In the end, it is better to achieve a lower but more stable return. That way you have more certainty that your investments will work out well.

Japanese growth

The development of the Japanese economy over time

Rule 3: Do not listen to nonsense

Many people decide to avoid investing based on nonsense. They have the wrong mindset and on that basis they decide that it is not wise to invest. For example, many people believe that the stock market is only accessible to the rich. This is absolutely not true. Even with a small amount, you can achieve good results these days. In our article investing with little money  you can read exactly how to do this.

Yet, other people believe that stocks are only for experts and that you need special training. This, too, is total nonsense. Nowadays, you can buy or sell a share via the Internet within minutes. If you don't have enough knowledge, you can always choose to invest in a fund. In this way you still benefit from the developments on the stock exchange without having to study them yourself.

Other people believe that trading on the stock market is no longer interesting. All the benefits would have already been achieved or the economy will only decline in the future. Again, this is a toxic mindset that will certainly not help you as an investor. Over a longer period of time, stock prices have only risen and by not stepping in you are selling yourself short. However, it is important to do this in a smart way.

Do you want to join the stock market in a smart way? Then it is best to do this by boarding periodically. No one knows if the stock market is going to collapse tomorrow or if it will continue to rise for years to come. By periodically depositing a fixed amount, you prevent yourself from getting in at the wrong time. This makes it possible to benefit from the average growth of the stock market which has only risen over a period of 100 years.

SP 500 shares stock price

Over the long term, stock prices have always done well

Rule 4: invest according to a plan

The smart investor, always invests according to a plan. Fortunately, this does not have to be a complicated plan with hundreds of pages of text. However, it is important to make some things clear to yourself. It is for example important to set a clear goal.  If you want to have a nice pension in 40 years, you invest differently than if you want to achieve a substantial return in the short term.

In addition, determine what your risk appetite is. When you do not need the money directly, you can take more risks. Are you about to retire? Then it's probably smarter to limit your risks a little more. Based on the time you have and the risks you want to take, you can decide which investment products you want to invest in.

Next, it is important to also develop a clear entry & exit strategy. For example, do you only trade in shares when the price is favourable or do you step in periodically? And do you sometimes take your winnings or do you hold the shares until the end of days? By thinking carefully about your plan, you prevent yourself from acting out too much out of emotions. A smart investor is a rational investor!

Rule 5: Embrace risks

Some investors make the mistake of avoiding risk. However, the savvy investor understands that you will not receive any reward without risks. As an investor, you are paid to take risks. When you avoid risks, your return is also a lot lower. If you want to invest wisely, you will have to take sensible risks.

The extent to which you should take risks depends very much on the time horizon of your investment plan. When you start investing at a young age, you can take more risks. When the market is bad, for a while you have plenty of time to wait for recovery. Many investment experts therefore advise traders to invest more in bonds as they age.

Personally, I am not a big fan of bonds in the current climate. Government bond yields are often zero or even negative. Instead, you could invest in more stable stocks that periodically pay a fixed dividend. Companies that have a stable income often pay out a portion of the profits to shareholders.

If you do not like the idea of embracing risk, it might be wiser to stay away from the stock market. The biggest mistake you can make is to run away from risk. Sensible risks pay off!

smart trading risks

Rule 6: Be prepared for bad times

It is unrealistic to expect stock prices to rise indefinitely. It is therefore important to prepare for potentially bad times. On average, good and bad economic periods alternate every 7 years. It is therefore important to take this into account as a smart investor.

In any case, smart traders ensure that they can always benefit from their investments. You do this by not stepping in on top. Since we can never determine with certainty what the highest stock price will be, we have to apply dollar-cost averaging. That way you will sometimes buy shares too expensive. However, this does not matter, as you can then buy the shares much cheaper again later.

The smart investor ensures that he or she also benefits from bad times. Churchill understood this well and famously said 'never let a good crisis go to waste'. There are several investment products that make it possible to take advantage of falling prices.

You have the option to take a short position on a share. For this you can use derivatives such as options and CFDs. With a short position, you earn money when the share price drops. Do you want to know how this works? In our article on about short selling you can read everything you need to know to take advantage of falling markets!

benefit bad times

Rule 7: fear is a bad counselor

Emotions play an important role in making decisions. In fact, research has shown that emotions are essential for making decisions. If you would not experience emotions because of brain damage, you could not make any decisions. However, it is important to be aware of the influence your emotions have on your investment performance.

Smart traders are rarely guided by fear. When the stock exchanges turn blood red, it's interesting to buy shares. Anyone can buy a stock when it rises and rises, but only sensible investors can buy it after a crash.

We all have a born tendency to avoid risk. This fear was very useful in prehistoric times. In those times there was danger everywhere. It would have been better to run away to many times than to be grabbed by a saber-toothed tiger. Fortunately, there are no more dangerous tigers lurking in today's society.

That fear often causes us to make decisions that do not work out well at all. We cut off profitable trading positions because we are afraid of losing our profits. At the same time, loss-making positions are kept open, because we are afraid to take a permanent loss.

The smart investor, never trades on the basis of fear. Therefore, draw up a clear plan and follow the rules closely. Investing without emotions is impossible. It is therefore important to sideline them by making the decisions at a calm moment.

fear wise investing

Rule 8: Understand what you are doing

Novice investors often dive into things they like. A good example of this is the Bitcoin. At one point, even the postman asked me if he should buy Bitcoins. When I asked him what he knew about investing, he looked at me in a blurry way. In this case, my answer was easy: NO. This eventually saved him about $10,000, as the Bitcoin then crashed sharply. After this I always received my post with an extra, broad smile.

Therefore, always make sure you understand what you are doing. Only trade in investment products you understand. Make sure you have a basic understanding of the stock exchanges before buying a share. Also, only invest in more exotic investment products after you studied them sufficiently.

Therefore, always ask yourself if you understand what you are buying. Is the answer NO? Then you should not buy the product. You will not receive a guarantee on investment products, so you cannot exchange the product if you are dissatisfied with the result.

bitcoin bubble

For an investment in bitcoin you need nerves of steel

Rule 9: Set your time

Most people who invest are not particularly interested in the financial world. Above all, they want to get a nice return and think it is a shame that their money is becoming less and less valuable. In this case, it is best to save time and use an index fund. With an index fund, you automatically buy a basket of stocks and spread your risks. By depositing periodically, you can benefit from the stock exchange developments with a minimum time investment.

Are you a smart investor and do you have time to really follow the stock markets? Then you can consider active trading. It is important to remember that very few people manage to beat the market. When you try to beat the market, you try to do something that even active fund managers rarely succeed in. Therefore, only actively trade when you find it interesting and when you have the time.

Do you lack sufficient knowledge of the markets? Then it is wise to start trading with a small amount of money. At the same time you can invest a monthly amount in an index fund so you do not waste time. By trading on the side, you can discover whether active investing is suitable for you.

Do you want to start trading yourself? Then be sensible and open a demo first! With a demo account you can try the possibilities completely without risk. Use the button below to compare the best trading demo accounts:

demo trading

Rule 10: Only invest with money you can miss

Let's start this last rule with two facts. The first fact is that investing almost always pays off in the long run. The second fact is that not investing always costs you money. Money in a savings account is becoming less and less valuable due to inflation and tax.

Still, this does not mean you have to invest all your money. Make sure you always have a savings account that you can use to pay for unexpected expenses. When you need to borrow money, you often pay a high interest rate. A loan can therefore significantly reduce your return.

Only invest with money that you can miss. Calculate how much money you need for your livelihood and invest with money that you do not need in the upcoming years. By doing so, you prevent a fiasco and you secure a better future for yourself!

How can you trade?

Nowadays there are all kinds of methods that you can use to invest smartly. Many people mainly use old-fashioned investment methods. They only buy bonds and shares at their local bank.  A major disadvantage to this method of investing is the fact that you spend a lot on transaction costs. Moreover, the return is often no higher than a few percent on an annual basis.  

If you want to trade smartly, you can consider an online CFD broker. With online brokers you can trade in a modern way, and by investing smartly with a broker you can achieve much better results. Why is investing with a broker so much smarter?

Trading with a broker is smarter

trading with an online broker is smarter because you can use leverage. By using a lever, you can make a high profit with a small amount. For example, if you decide to trade with $100 and apply a leverage of 1:10,  you can trade in $1000 worth of shares. When you use a leverage, both your potential winnings and losses magnify.

This leverage also allows you to obtain results with a low amount of money. The transaction fees are relative. Therefore, you do not pay a disproportionate part of your position in transaction costs.  In the end, trading with an online broker can be smarter....

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