As the stock markets start to normalize, investors will eventually start to buy up riskier investments in the markets and exchange traded funds (ETFs). How can we be prepared to make better and wiser investing choices in the future?

When the stock markets collapsed, investors looked for alternative and “safer” places to stash their wealth. But now that we’re seeing some stability, investors are finding themselves returning to riskier stocks, remarks Johnathan Burton for MarketWatch. Just look at the resurgence of activity in the junk bond market for evidence of this.

The Golden Rule of investing is this: Don’t be overconfident. A trader may feel he or she understands everything about the trends but some time should be spent to study up further by asking some key questions.

Here are some things Burton thinks a potential investor should ruminate over:

1. Expectations. How much return is enough? Although an investor shouldn’t expect a set amount of returns, you should be realistic or you may take too much risk in waiting for the long-odds bid. Hope for the best and prepare for the worst. You may also be interested in our strategy for ETF investment. By having key signals at which you buy and sell, you can override those emotions.
2. Chasing the money. Most investors tend to jump into a hot area after the money has been made. Instead, you should focus on the present and see if an area is doing better based on fundamentals or speculation, or if it’s because the investment is a good value or overvalued. This also ties in with having a strategy – by training yourself to look for trends, you can be in those areas that could potentially move higher.
3. Active Trading. Some brokers goad performance chasing and other “short-term” thinking. Maintain your objectivity instead, and again, follow the trends and stick to your strategy. Don’t make impulse purchases that run counter to the way you operate when making trading decisions.
4. Choices. There is a cornucopia of different investment choices available, but try and narrow options to a few funds so that you may easily follow them. Trying to research 20 ETFs is a far less daunting task than trying to take on all 800-plus. It is also advised to get information from independent and reliable sources.
5. Research. Most people don’t know how to research stocks, evaluate performance or read annual reports, and many don’t even bother with it. It is essential to pick through the numbers to see if a stock is overvalued or undervalued; it’s also essential to know what you own. Never buy something you don’t understand.

Max Chen contributed to this article.

Tags: ETF 101, Trend Following