COLLECTION: INVESTING 101

4 simple tips for investing better

See 4 tips that every investor could consider vital for their decision-making.

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I have now been writing for The Motley Fool for a little over six years. In that time, many things have changed in the market and in the world, yet the best investment advice stands the test of time. Here are four timeless lessons every investor should learn.

1.Pay off debt

This is basic, but it needs to be said. While there are many roads to success, one of the common paths to failure is overusing debt. As Warren Buffett has said:

"I've seen more people fail because of liquor and leverage—leverage being borrowed money. You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing."

If you have credit card debt or other debt on which you pay 5% or more in interest, pay it off. If you are considering investing in the market while also carrying debt, you are betting you can earn higher returns than the amount of money you could save by paying down your debt. While debt can boost how much you earn, it also greatly increases the amount you can lose.

2. Keep your eye on the prize

The most successful people are incredibly focused toward their goals. For instance:

  • Bill Gates stayed focused by ignoring everything outside of his chosen domain, that was first programming and Microsoft, and then switched to The Gates Foundation and health, poverty, and opportunity.
  • Warren Buffett is also renowned for his focus and has a unique strategy for focus in life and investing.
  • Apple co-founder Steve Jobs was a big proponent of focus and emphasized the idea that choosing what not to do is more important than what you choose to do.
  • Amazon CEO Jeff Bezos makes life choices based on his regret minimization framework.

3. Use a margin of safety

In investing and in life, it is best to maintain a margin of safety to avoid disaster in case something goes wrong. Having a margin of safety means leaving room for bad luck, mistakes, and other misfortunes so that even if everything goes wrong you do not take large losses. The future is uncertain; be prepared for it.

When it comes to your personal finances, a margin of safety means a cash emergency fund with at least six months' worth of living expenses. With interest rates so low and the market doing well, many people have a problem with the idea of holding cash, but an emergency fund can provide a much-needed cushion in hard times. The best place to put your cash is somewhere where it will be safe until you need it. If you want to use your savings to buy a house in two years, your money should not be in the stock market.

When it comes to investing, your margin of safety comes from your process. Individual investors are far too active, buying when the market is rising and selling as it drops. For those that invest in index funds and mutual funds, a margin of safety comes from regularly investing capital no matter what the market does, also known as dollar-cost averaging.* In this way you match the average returns of the market, outperforming the average investor.

For those who invest in stocks, a margin of safety is the difference between the price you pay for a company and the price you think that company is worth. If you don't understand how to value a business, you shouldn't be investing in individual stocks.

4. Learning is the best investment

The most successful people in the world become that way by continuously learning and improving themselves. There is no age at which you're old enough that you don't need to learn anymore. The secret to Warren Buffett's success is that he is a learning machine.

Buffett has explained his learning process thus:

"Read 500 pages like this [annual reports, trade journals, etc.] every day. That's how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it."

Reading is the best way to gain experience without having been there yourself. While 500 pages a day is more than most people can handle, if you set aside even 30 minutes a day to read a book, you're ahead of the game. If you don't know where to start, I suggest the 12 best business books of all time. Let your knowledge compound so that you'll be ready when unbeatable opportunities present themselves.

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* Dollar cost averaging does not assure a profit or protect against a loss in declining markets. For the strategy to be effective, you must continue to purchase shares both in market ups and downs.
Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.
This article was written by Dan Dzombak from The Motley Fool and was licensed as an article reprint. Article copyright January 21, 2015 by The Motley Fool.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third party provider of the reprint permission and Fidelity Investments are independent entities and not legally affiliated.
The images, graphs, tools, and videos are for illustrative purposes only.
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