Discover five facts about investing in stocks that will help you make better investment decisions over the long term. Learn more in this article now.

To succeed as an investor, you need to keep matters in perspective. Despite wars, recessions and market setbacks, stock prices generally reach successively higher levels over long periods. You can’t foresee the next downturn. But you can buy high-quality investments gradually during your working years, sell them gradually in retirement, and reinvest your dividends along the way.

Today we are looking at five facts about investing in stocks that savvy investors should consider.

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Facts about investing in stocks, #1: Higher investment quality = lower risk

If you invest mainly in well-established, dividend-paying companies, you’ll find that any investment or market timing mistakes you make will rarely cause serious or permanent losses. When you spread your money out across most, if not all, of the five main economic sectors, you’ll cut your vulnerability to market risk all the more.

In contrast, your market timing skills are bound to be crude and unreliable. They will never protect you from the risks of investing in companies with flawed business plans.

Moreover, even the best market-timing skills are useless when it comes to protecting you from untrustworthy insiders. If we have reason to doubt the integrity of a company’s insiders, we stay out, no matter how tempting it seems. Those are the risks we focus on and attempt to avoid.

Facts about investing in stocks, #2: Short selling is very risky short-term trading strategy

Short-selling is when you borrow stock from a broker and then sell it. However, you eventually have to buy back the stock on the market to return it to its owner. If the stock falls in price while you are “short,” you can buy it back at a lower price. You have then made a profit. But if the stock rises in price, you must buy it back at a higher price than when you sold it, and you lose money.

Attractive short-selling opportunities do come along from time to time, but it’s a hard way to make money. That’s because, compared to buyers, shorts face a broad range of disadvantages.

For one, the returns on short-selling stocks are upside down: when you sell short, your maximum gain is 100% (if the stock you’ve shorted goes to zero). But your potential losses are limitless. That runs directly counter to a regular stock purchase, where your gains are theoretically unlimited, and the most you can lose is 100%. You also have to pay for any dividends declared by stocks in which you have a short position.

Facts about investing in stocks, #3: Regression to the mean is inevitable

No investor and no investment can earn an outsized return indefinitely. Eventually, a high yearly return will come back down toward average. Sometimes, it will fall until it drops far below average, or turns into a loss.

Don’t buy a stock just because it’s going up, and don’t follow an advisor just because he or she has had a great year or two. You have to look deeper to spot good investments and good advice.

Facts about investing in stocks, #4: Steady gains from a disciplined plan will set you up for a bright future

If there is one piece of personal wealth management advice you should immediately implement, it’s to have a disciplined plan for saving during your working years. This, above all things, can set you up for optimal investment gains. We talk more about this in 9 Secrets of Successful Wealth Management, which is free for you to download.

Many of our wealth management clients live off their investments. From time to time, they need to sell some of their holdings to supplement their dividend income. But rather than trying to predict price changes or spot highs and lows, we ensure that decisions affecting the client’s portfolio are tailored to his or her circumstances and temperament.

Facts about investing in stocks, #5: Recent IPOs tend to be a poor investment choice. But that’s especially so in a market situation where volatility is likely to be above average for some time.

Human nature puts the odds against you when investing in IPOs or Initial Public Offerings (we also refer to them as new stock issues).

Insiders decide when to bring a new IPO to market. They mostly do so only when it’s a good time for the company or its insiders to sell stock to the public. That means IPOs tend to come to market when the company or its industry is enjoying what may be a temporary improvement in its business or profit. If the improvement is only temporary, this generally isn’t a good time for you to buy.

Use our three-part Successful Investor approach for all of your investments

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

Have you found any investing facts that have helped you succeed and profit over the years?