The process of investing doesn’t have to be tough or complicated, but there are a few investing rules that can keep you on track and help you reach your financial goals. But keep in mind that investing entails risk, so even if you are disciplined and follow the rules, you can still get back less than you invested.
Here are the ten investing rules that every investor should be aware of.
1. Plan your objectives is the first and foremost among the investing rules
It may be easier for you to stay to your plan if you are aware of your financial objectives and the length of the period you are investing over. For instance, you might be less likely to give in to temptation if you have long-term objectives, such as saving for a retirement that could be decades away.
2. The degree of risk increases as possible profits rise
Although the possibility of higher returns may be alluring, there is typically a greater chance that you will lose your money. Consider your approach to risk very carefully. Even if the returns on less risky assets are probably smaller, you could feel more secure choosing them. Though no investment is without danger, keep in mind that there is always a potential you could get back less than you invested.
3. Avoid placing all of your eggs in one basket
We’ve all heard the proverb, “Don’t put all your eggs in one basket,” but when investing, it’s especially crucial to follow it. You won’t be overly dependent on one form of investment or locale if you spread your money over a variety of other assets and geographic regions. There are no guarantees, but if one of them underperforms, hopefully some of your other assets can offset these losses.
4. Long-term investing
Never think of investing as a “get rich quick” scam. To offer your investments the best chance of producing the returns you’re aiming for, you should stay involved for at least five years, preferably much longer. Even then, you must feel at ease embracing the possibility that you might get back less than you invested. You shouldn’t invest if your financial goals are short-term, such those that are two or three years away, as you’ll need to have your money accessible, typically in a savings account.
5. If something sounds too good to be true, it probably is
Avoid highly speculative investments that look too good to be true and avoid investing merely because others are doing so. For instance, as Bitcoin’s price soared in the second half of 2017, many investors flocked to the cryptocurrency, only to watch it lose half of its value in a single month. Bitcoin was trading at about $20,000 in mid-December 2017, but by mid-January 2018, it had dropped to under $10,000.
6. Never make an investment you don’t fully comprehend
Make sure you thoroughly investigate any investment before investing your money in it, so you know exactly what is involved and what the risks are. For instance, funds publish Key Investor Information Documents (KIID) or Key Information Documents (KID) that outline the fund’s main characteristics and fees. Investors must have this in mind before making an investment. Make sure you understand the business’s operations and long-term financial goals if you invest in specific companies.
7. Calculate charges
When selecting your investments, it’s critical to keep fees and charges in mind as they will affect your overall results. For example, the Ongoing Charges Figure (OCF), which is displayed on the KIID/KID and gives the best indication of your actual costs, applies when purchasing money. This sum covers the annual management fee for the fund as well as the other significant continuing expenses that were taken from the fund the prior year. We will also provide to you other fund expenses that the management has not included in the OCF when you place a purchase instruction. You should carefully analyze these expenses because if a fund returns 4%, but the OCF and other fees have already added up to 2%, your profit would only be 2%.
8. Reinvesting earnings may increase overall returns
If you don’t require an income from your assets, you could want to think about reinvesting it to purchase further investments that could increase in value and increase your overall returns. However, keep in mind that reinvesting income rather of using it immediately puts you at risk of losing it or seeing its value decline. You won’t be able to determine the price at which you will be purchasing any additional shares if any income you earn is automatically reinvested. For instance, if you invest directly in shares and have signed up for automatic dividend reinvestment (ADR), the price could be low or high.
9. Never attempt to time the market
In a perfect world, you would be able to acquire stocks just as their value was about to rise and sell them just as it was about to drop. However, no one can foretell the direction in which stock markets will go next, thus attempting to forecast market ups and downs could result in you making the incorrect purchase or sale. When markets are volatile, buying and holding stocks might help you stay committed to your investments over the long run and prevent rash decisions.
10. Look over your portfolio
Even if excessive fiddling with your investments is typically not a smart idea, this does not mean you should disregard them. Your investments’ values will fluctuate over time, which could cause your asset allocation—the way you decide to divide your funds across various assets, including stocks, bonds, cash, and real estate—to diverge from your investing goals. To make sure you’re still on course to achieve your goals, you might need to periodically rebalance your portfolio.
