To wit, here are 10 investing rules that can guide you through your investment journey.
Top investing rules
Investing never has to be as complicated as a lot of people make it seem, but that doesn’t necessarily mean it should be easy as well. When you put your money to work in the financial market, you are looking for an avenue to get what you desire from life, while also ensuring that you have the peace of mind that lets you sleep soundly on a nightly basis. However, this journey is one that promises to be a roller coaster.
When you want to invest, you will have to draft a clear and concise plan, go on your research, ensure your safety by putting each stock’s valuation in mind, and learn to be patient. You are free to put in some speculative picks if you’ll like that, but you need to ensure that they don’t make up the majority of your portfolio. Getting a tech or oil company with doubling, tripling and quadrupling shares is what everyone wants, but these companies- at the very least- are incredibly rare.
If all investment rules sound simple, then it’s probably because they are. Market slumps are inevitable, but you have to embrace them, as they present opportunities to buy stocks, bonds, and funds at incredibly cheap prices; you don’t necessarily have to throw a fit and dump your stocks for the first person who comes to you with a price.
Never invest without a plan
Rule 1 investing: before you decide to let your cash start working for you, it is important for you to know what you are investing in and what you are investing money for. By doing this, you will be able to condition what you expect to get in return, know how long you’re willing to invest, and how much risk you are willing to make. You’ll also be able to get asset classes that are bespoke to your aim and what you’re hoping to achieve.
Only invest in things that you can clearly understand
One of the most prominent fund managers ever once said that he would never touch anything that he could not describe on a sheet of paper. Losing money is one thing, but it’s another thing to lose money without even knowing how and why you lost it. To wit, make sure to stick to what you know and before you invest money, be sure to do your research.
Never make the mistake of putting all your eggs in one basket
If you can follow only one investment rule, it should be this one.
When you keep a diversified portfolio of about 15 stocks, bonds, and funds, you will be able to cover most of the eventualities and still keep some amounts pouring into your official savings account, almost regardless of the financial climate (although this will also depend on whether they can cover a wide range of locations and industries).
This number is also rational when it comes to dealing costs, the management of news flow and the periodic measurement of investment performance.
Never disrespect the market
One of the major characteristics of markets is the fact that there can be astonishing rises and gut-wrenching crashes. This characteristic just goes to show that there is almost no way of guaranteeing an efficient and reliable market. However, this is not a warranty for you to go about disrespecting their views. When you make a purchase or a sale, you are essentially challenging the power of the market to be right, and it is important for you to have a reason why you’re doing so.
Traveling is more desirable than arriving
Financial markets discount events that can happen in the future (or at the very least, they price these events). This is why you can have a share price rise on bad news and fall when good news arrives, as these valuations are already considered with respect to these events.
Sometimes, you might have to go against the pack
Punters are known for skint backing favorites, and while this tactic will most probably work for people in the short-term, impulsively following names that are over-hyped and which have all the momentum can prove to be very dangerous. In order to get the best long-term investments, you will end up having to let go of the names that everyone is fond of talking about and purchasing those that are being largely ignored. If the valuation is correct and there is growth, the risk and quality checks are easily met.
Nothing beats cash
While profit is usually a concept that is based on subjective human opinions, cash flow deals with facts and facts alone. A lot of shady fund managers will try dressing their profits up, but there is no way you can fiddle with cash.
A lot of accidents occur when a company looks more profitable but is only making little cash, so make sure to research the cash generation ability of a company before looking at individual stocks.
It is important to undertake dividend reinvestment
Another important one in investing rules is to use the advantages of compounded interest.
People who build their portfolios patiently should focus more on firms that have higher competitive advantages as well as tenable reasons why people should pay for the products and services that they’re offering. This provides the power of pricing that enables companies to make more and pay the dividends that accumulate to form your earnings and savings.
It is not different this time around
These might be the most expensive words when it comes to investing rule. They are capable of leading a carefree person to pay just about any price after hearing a good story without looking at valuation and certain consequences. Simply put, if something looks too good to be true, then there’s a high probability that it actually is.
Value- not price- should be your focus
Regardless of whether its value is $2, $10 or $50, you will not go into a pizzeria and just order the first box of pizza that you see. Instead, you will try to employ your judgment to decide which pizza offers good value, then splash the cash on that.
The same form of discretion should apply to your investment.
There are quite a few metrics, in the whole context of risk, quality, growth, etc. that can help you decide on whether a value is too costly, overly cheap, or just the right price.
Final thoughts on rule 1 investing
All in all, these investing rules should be able to guide you throughout your investment journey. Remember to be smart and thorough when evaluating options, and stay informed on the latest stock market news, especially when it comes to your investments.
As a beginner, you might want to see our 5 step investing guide.