Investing is, in actuality, a game with very few elementary rules of success but always a minefield of traps and pitfalls of the emotive kind. Knowing all of the age-old advice about “buy low, sell high,” our emotions drive instead, panicking at its going down, and joining the party when all hell breaks loose.
That’s why a set of “golden rules” is necessary to navigate the unpredictable world of investing. Sure, anyone can ride the wave when the market is soaring, but it’s during turbulent times that separates the winners from the losers.
So, here are 10 golden rules of investing to help you become not just successful, but hopefully, wealthier too:
1. Understand Your Risk Tolerance
The first and most important rule of investing is understanding your risk tolerance. Risk tolerance is the amount of risk you are willing to take in order to achieve your financial goals. There are various investments, and each one carries different levels of risk, ranging from low-risk bonds to high-risk stocks.
Assess your personal risk tolerance before you invest. You may need to consider factors like age, income, financial obligations, and investment goals. If you are relatively young and have a long time horizon, you could tolerate a higher level of risk for the possibility of more return. If you’re close to retirement, then a more conservative approach is in order.
2. Research
The biggest mistake you could make would be to invest without doing adequate research. Whether you’re investing in stocks, bonds, mutual funds, or real estate, it is important that you understand what you’re investing in. Research makes the difference between making correct decisions and being an impulsive/emotional buyer.
Know what assets lie beneath, the health of the companies, the trends in the industry, and how the economy might be affecting your investments. If you can’t seem to find the time or information to do so, perhaps you would like to see a financial advisor or to work with investment tools that will give you information and analysis.
3. Diversify Your Portfolio
Diversification is one of the most important risk-reducing strategies in your portfolio of investments. Instead of having all your money concentrated in one asset or sector, you diversify by spreading it across various kinds of investments. For example, you can invest in a mix of stocks, bonds, real estate, and even commodities.
By diversifying, you minimize the risk of your portfolio being damaged by one failed investment. When one sector or asset class gets hit hard, others may continue on their way, balancing that risk in your overall picture. Diversification never promises profit or protects one from losing money, but helps reduce the volatility of that portfolio.
4. Long-Term Investing
Patience is the key ingredient to successful investing. Long-term investing is a strategy that allows your investments to grow and compound over time, thereby benefiting from the power of time and compounding interest. While the stock market can be volatile in the short term, with sharp ups and downs, historically, markets have trended upward over the long term.
Long-term investment does not always mean trading every now and then due to the market movement. Remain steadfast on the strategy and be patient so that time will do it for you.
5. Set Clear Investment Objectives
Clearly define and specify your investment goals before investing. This will help you make better decisions about investments and keep you on track.
Goals help one choose the right investment strategy and investment vehicle. For instance, if you are saving for retirement, you may prefer to invest in tax-deferred accounts such as IRAs or 401(k)s. If the goal is short-term, you may opt for a more conservative investment that generates returns but with lower risk.
6. Avoid being emotional
Emotions and making investment decisions is the largest trap in investing. Everyone has experienced euphoria in market movements when stocks are rallying and panic selling when market trends decline. Such behaviors, therefore, make them lose money in investments and the opposite of the art of investing.
Avoid emotional investing by sticking to your plan and having a disciplined approach. If you feel anxious or impulsive, take a step back, review your goals, and remind yourself that market fluctuations are normal. A well-thought-out investment strategy will keep you calm and rational in times of uncertainty.
7. Understand What You’re Investing In
It is very tempting to jump into popular investment opportunities without properly understanding them. This might prove to be dangerous, since you may end up buying something you do not even understand. Always take time to understand what you are investing in. In case you are buying individual stocks, ensure you know about the company’s business model, its financial performance, and the industry in which it operates. For mutual funds or ETFs, know what the underlying assets are and what the fund is doing.
If you have no idea what an investment is, consider hiring a professional advisor or using some resources to educate yourself before diving in. Knowledge is power, and investing in things you don’t understand is a recipe for disaster.
8. Have an Emergency Fund
You must have an emergency fund before you invest. Life is full of uncertainties, and at times, you can end up with unexpected expenses. For instance, medical bills, car repairs, or even job loss are unforeseen expenses that might call for you to sell your investments at the wrong time and thus lock in losses.
This money should be available on short notice, like in a savings account or money market fund. Any financial advisor would recommend one to save enough for three to six months’ worth of living expenses before being locked into more speculative investments.
9. Re-invest Earnings
Another most effective way for increasing wealth over time through reinvesting your gains. The dividends earned through your investment in stocks may be used to buy the stocks while the interest derived from bond investments is taken back and invested into them. Upon reinvestment, you will basically be purchasing a new share in the asset to enhance compounding returns for a future period.
Take dividend-paying stocks for example. Reinvestment of dividends means you get more shares in the stock, thereby increasing your exposure to its growth potential. Reinvestment can add rocket fuel to the growth of your portfolio, especially during long-term investing.
10. Monitor Your Portfolio Periodically
You do not forget your investment because you have put it in. Periodically reviewing your portfolio is crucial to ensure that it continues to meet your goals, risk tolerance, and time horizon. With time, some investments may outperform others, while some may not. This is when rebalancing comes in handy to restore the right proportions.
Rebalancing your portfolio involves selling some assets that have grown disproportionately large and buying others to keep your allocation in line with your goals. It’s also a good opportunity to assess whether your financial goals have changed and make adjustments accordingly.
Conclusion
Investing is a very powerful wealth-building tool, but it has to be done with careful planning and consideration. With these 10 golden rules, you will be able to avoid common pitfalls and make smarter, better-informed decisions. Take into account your risk tolerance, do your research, diversify your portfolio, and be patient for growth over the long term.
FAQs:
How much to put in the stock versus bonds?
The appropriate stocks-to-bonds ratio will depend on the risk tolerance, time horizon, and financial goals. A simple rule of thumb is the “100 minus your age” rule: subtract your age from 100 to determine the percentage of your portfolio to invest in stocks. The remainder is invested in bonds. Of course, this is only a starting point. For personalized advice, consider consulting with a financial advisor.
What is the best way to get into investing?
Start with a goal, know your risk tolerance, and begin with a small amount. Select a reputable broker, invest in low-cost index funds, and stay invested for the long term.
Do I need a financial advisor or can I invest on my own?
It all depends on your financial acumen, time, and tolerance for risk. Financial advisors can guide you through the way in investment choices and managing your own portfolio if you don’t have many of these in abundance. If you are comfortable handling investments and spend your free time researching how you should invest yourself, it’s not much of an issue to act accordingly. The one certified financial advisor you can approach for all your financial goals is VSRK Capital.
How do I track my investments to ensure they meet my goals?
Monitor the investments and ensure they achieve their intended goals: Periodically follow up on your portfolio performance and track your investments vis-à-vis financial objectives.Define your specific measurable goals-for example, such as a target retirement saving goal-and then monitor and rebalance returns as often as necessary to maintain that desired asset allocation.
Use investment tracking tools or applications to monitor individual investments; check from time to time to make necessary adjustments with regard to market conditions or change in personal situations.
