Investing has proved to be one of the major strategies to compound long-term wealth and financial security. It is a solid proof way to multiply your earnings without putting in as much work as you do in your day job. However, it requires plenty of patience and discipline. That’s right; making money from investments is not as easy as it sounds. Else, wouldn’t everyone be doing it?
More people continue to look into ways that they can invest their hard-earned cash without having to undergo risk. It pays to understand that one can’t really escape risk, as investing itself is a form of risk. Even so, there are some valuable rules which, if followed wisely, may up your chances of receiving a good return.
Many have struck gold in this mine called investing and in so doing, have laid out bread crumbs that others can follow to reproduce their success. Here are some investment rules you can learn from the world’s top investors:
- Don’t put all your eggs in one basket
Holding your entire savings into just one mutual fund, stock, or non-diversified investment type increases market risk. You want the goals and performance of your investments to have a minimum correlation with each other. This is a good diversification.
“Do you really like a particular stock? Put 10% or so of your portfolio on it. Make the idea count. Good [investment] ideas should not be diversified away into meaningless oblivion.” – Bill Gross
A wise thing to do is to keep some cash for opportunities that may require a little more capital. Don’t shy away from acting if you believe that your analysis has led you to a real winner. Use this ideology to create a broad portfolio.
- Don’t time the market
First, do not sell at the first assurance of profits. Instead, let winning trades run. Moreover, do not let a losing trade go. Sometime down the investing road, you’ll come to learn that it’s okay to lose a small amount of money and that indeed, losses are a part of winning. No one can predict the market. But you can let winning trades run and be quick to get out of the losing ones.
“Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are ‘right’ only 30% of the time, as long as our losses are small and our profits are large.”- Dennis Gartman
- Take informed decision
Do you recall a time that you have invested your money somewhere based on an article you read, a news report, or a tip from a friend, and lost the money anyway? As an investor, the only piece of advice you should follow is your own exhaustive research that you have gathered from trusted sources. This isn’t to say that you cannot consider other advice. Just don’t use it as the sole reason to commit your money.
- Take a disciplined investment approach
An investment objective is the purpose a specific portfolio is supposed to serve with regard to your financial needs. Some points that you can use to determine your investment objective include:
- The purpose of your money
- The amount of time you have before you need it
- The level of risk you’re willing to take on your investment
- If you wish to preserve the current value of your money or to grow it
Once you’ve made clear the objective of your investment, It’ll be easier to determine the particular security types and asset classes that will best accomplish the purpose of your portfolio.
- Invest in business you understand
First of all, it is wiser to invest in a business than a stock. Consider these two major tips when evaluating a particular company.
- Look at where the company stands in terms of quality. Listen to conference calls, understand balance sheets, and raise your confidence in the management.
- Only if the quality of the company matches your investment standards should the price be assessed.
Understand that a low-quality company goes for a low price and this is directly proportional to the Return On Investment.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”-Warren Buffett
- Don’t let your emotions cloud your judgment
The lure of fast wealth is almost impossible to resist. As such, many investors have lost their investments to fear and greed. Greed sets in when word gets out of astonishing returns on a certain investment within a short period. This leads the investor to make speculations and trade shares of unknown companies without really comprehending the risks involved. Should the market reverse, they end up losing everything. The same happens when an investor panics and sells his/her shares at rock-bottom prices.
One way to keep your emotions in check is to avoid the herd mentality. Always operate based on your own understanding.
- Keep expenses low
High expenses drag the performance of an investment, especially when stretched out over long periods. It’s fundamental finance- the more money you have going out, the less you’ll have coming in.
- Monitor heavily
The world has been reduced to a global village. With its systems closely connected, any major happening could impact our financial markets. It falls on you to constantly monitor your portfolio, applying the desired changes to it whenever the need occurs. At times, you’ll lack the time or the knowledge to do this. Such a case would require you to seek the services of a competent financial planner or another professional who’s capable of the same.
The desire to make money work for them has grown among individuals of the 21st century. With today’s harsh economic times, people are working more and more for less; a reality that has made them look for alternative means to make their lives easier and more pleasant. Investing has offered an escape from this situation.
Follow the above rules as you embark or continue on your investment journey so you can grow your skills as a solid investor. Eventually, you will have a taste of the large pie that this venture has to offer.