8 Golden Rules of Investing
When it comes to financial security, investing is a key part of building wealth.
The problem is that investing can seem difficult to start or hard to keep going. Most investors spend too much time trying to pick the “perfect stock” or time on the market.
While investing is never an exact science, certain rules dictate the success or failure of any wealth-building strategy.
This article discusses basic principles that anybody can apply to achieve great results, even if you’re starting with limited resources. Read on to learn how the golden rules can help you create investment plans for long-term value accumulation.
- Understand Your Investment
As an investor, you should only invest in things that you understand.
This does not mean that you should only invest in industries of your expertise. Rather, you need to understand how an investment functions. When investing in a company, understand how the company’s business model works and how it will generate revenue in the future. If you are investing in a mutual fund, understand the fund’s objectives and what strategies are used to achieve them.
Your future finances are linked to how your investments perform, so it’s vital you know the key info before you invest.
- Be Consistent
Set money aside for your future every month and make it a habit.
To make the process simple, set up automatic contributions to make the process simple. How it works is every time you get paid, a portion of your paycheck is automatically directed to an investment or retirement account, so you do not have to think about it.
This strategy allows you to take advantage of dollar cost averaging. Not only does a regular investment strategy help to remove the emotional aspect of investing, but it also enforces discipline.
- Combat Risk with Diversification
Investing comes with inherent risk, but you can always be proactive to protect yourself.
Diversification is a fundamental rule of investing that allows you to take a middle road through the ups and downs of market performance. Creating a healthy mix allows your investment to grow regularly with smaller fluctuations along the way.
Spreading your money across sectors, assets, securities, and geographical areas is the most effective means of managing risk. You will be less affected by losses in any one investment and gains in other investments may even offset them, although there are no guarantees.
- Don’t Time the Market
It’s easy to assume that successful investors were just lucky that they ‘got in at the right time.’
‘Market timing’ involves buying and selling based on the belief you can pick where the market is heading in the short term. In reality, this is very hard to do. Financial experts have proven that nobody can successfully time the market continually.
Share market growth often comes in dramatic spurts, which you can easily miss if you’re seated on the sidelines waiting for an expected bear market or correction to occur.
It’s impossible to reach your long-term goals with short-term thinking.
- Do Not Let Emotions Cloud Your Judgement
As mentioned, equity markets are known to be volatile. Do not let that scare you, though. Panic can force you to sell your investments at rock-bottom prices rather than stay the course.
In a bull market, the temptation of quick money is tough to resist. Greed augments when you hear stories of excellent returns being made in the stock market within a short period. This can make you speculate and purchase shares of unknown companies without really understanding the risks involved.
Building wealth is your goal, so keeping your emotions out of the process is key.
- Stay in The Market for The Long Haul
Investing should never be considered a get-rich-quick scheme.
With investing, time is your best friend. Time has two wonderful properties – reducing the risk of a negative outcome and reinforcing the power of compound interest.
It would be best if you remained invested for at least 5 years to give your investments the best chance of giving the returns you’re hoping for.
The range of historical returns for each asset class can guide you on the returns you can expect for a period. Equity market volatility is a short-term phenomenon, but history has shown that equity markets rise over the long term.
Investing for the long term will allow you to enjoy the power of compound interest, something Einstein termed the “eighth wonder of the world.” Re-investing your gains can have a significant impact.
- Review and Rebalance
We are living in a global village. Any significant event happening in any part of the world can impact our financial markets (and your investments).
Since you’ll be investing for the long haul, it’s vital to do regular check-ins to stay on top of your finances.
Your original asset allocation can sometimes get out of balance, so you’ll need to rebalance it. For instance, the stock market may swing in different directions, effectively shifting the percentages of your investments. As an investor, you want to work toward maintaining the percentage of stocks and bonds that will help you reach your goals.
Failure to take any action with market fluctuations means you could have much more of one asset class than another.
That said, too much tinkering with your investments is a bad idea.
- Use the Wisdom of Professionals
To gain a full understanding of the risks and opportunities involved and increase your chances of success, work with an Investment Counselor.
Never invest in anything you don’t understand. An Investment Counselor will help you design an investment portfolio that best fits your budget, risk appetite, and time horizon. They can provide access to planning tools that can help you apply these golden rules to your needs.
While quality investment counseling incurs a fee, making poor investment decisions is much more expensive.
Conclusion
If you’re wondering how to invest, using these 8 simple investment strategies will help you put your money to work and help secure your future.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.