10 Basic Rules of Investing
Whether you are investing in the stock market or real estate or on something else, investing has its own risks and rewards.
There are those people who stay away from investing because they don’t feel that the rewards outweigh the risks associated with such investments. Many of them choose to invest, instead, in safer investments like term deposits. These investment vehicles post little to no risks at all.
They may be right to invest in safer investments especially when you look at the current situation in the stock market.
Then, there are those people who take the risks in the hope of reaping more rewards. Some of these people, the ones who take a plunge into the investing world filled with risks, took their time to educate themselves on the investments they choose. This is one of their ways to understand more about their investments and help them make wise, smart decisions. This is also their way to lessen their investment risk exposure.
On the other side of the token, some of those people, the ones who take the risks, invest their funds without fully understanding what they are getting into. Sometimes, they make their investment decisions based on the words and analyses of other people. This is just the reality.
Rules of Investing
Regardless of the knowledge or lack thereof regarding investing, there are ways or basic rules in investing that you, as a potential investor, can use whenever you make your investment decisions.
Tip #1: Learn before you invest
The first, and sometimes the most important, step when it comes to investing is to learn the basics. You don’t go to a battle without understanding who your opponents are. You don’t go into a battle without arming yourself with tools and equipment necessary for your success and/or survival. The same reasoning applies to investing.
Whether you want to invest in the stock market, venture to businesses, or dip your hands in the world of real estate, you need to understand the (basic) concepts of such industries. You need to understand the potential risks and rewards and what you can do to minimize risks and maximize rewards.
You will need to do your research and may need to interview individuals who have already gone in the industries you what to go to get personal insights and experiences. Don’t just invest because the time is ripe and everybody is jumping in.
Remember the best defense and asset you have when it comes to investing is your knowledge about those investments.
Tip #2: Define your purpose
There are different kinds of investments. You just don’t invest in any or all of them without defining what your purpose is for investing.
Are you investing for potential dividends? Are you investing for immediate capital appreciation? Are you investing for quick turnaround of money? Are you investing because you want residual income in the future? Your purpose will define what kind of investment best fits you.
Do not rush into investing without fully understanding what your purpose is. It’s easy to get lost into multitude of investment strategies out in the market. If you ever put your funds without defining your purpose first, you may find yourself not happy with where your investment is going. You may find that the investment is heading somewhere that doesn’t align with your purpose or expectations.
Tip #3: Be prepared (for the worse)
Never assume that your investment will always make money. Don’t assume that because you’ve done your assignment of researching and weighing both risks and potential rewards that you will earn returns from your investment.
The truth with investing is that most investments don’t promise returns except for a couple of investments or insurances like annuities, certificate of deposits, and the likes.
Just remember that if investments always make money for the investors, then, all people would definitely put their money into various investments. Nothing is promised with a lot of investments.
Be prepared to lose money or gain money. No one wants to lose and everyone wants to gain. The reality is, your investments can go either way or it can stay flat. Most people will try to predict the outcome but this prediction is nothing but a guess of what the results will be.
Tip #4: Be prepared (for the opportunities)
As an investor, you need to re-visit your investments from time to time. You need to this in order to make sure that your investments are still aligned with your purpose. In addition, you need to re-visit your investments to make sure that what you have are the best possible opportunities for you.
If you happen to find other opportunities, then, make sure to re-balance your investment to take advantage of such opportunities. One tip before investing is that you need to make sure your investments are flexible, which means that you won’t be penalized if you ever re-balance your investments.
For example, you will get penalized if you want to pull your certificate of deposits (before their maturity dates) so you can move the funds that have better returns.
On another note, some investments cannot easily be changed. If you happen to invest in the real estate market, it is true that even when you find other opportunities for your money, you may not be able to take such opportunity. This is because house investment is as not as liquid as other investments.
Tip #5: Set aside emotions
Never mix emotions with investing. To make it clearer, invest logically not emotionally.
A lot of investors have their own goals and purposes for investment, which are good. However, a lot of them tend to become emotional and lose track of their goals and purposes when something bad suddenly happens.
Many people become emotional when something bad happens. It’s called human emotions or human nature and it’s natural. But when it comes to investing, you should always set your emotions far away as much as possible.
Remember, it’s always in your best interest to be logical and not emotional. Always remember what comes down must come back up. It’s the same with the stock market deep in 2008 and rise in 2009.
Tip #6: Invest based on your goal and not on what the herd does
It’s human nature to follow what others are doing. Almost always try to stay away from this kind of attitude.
Remember that just because a lot of people invest in specific investments does it mean that you need to invest there too. Your investment goals may or may be different from them. This means that the investments they put their money into may not align with your goals.
If ever you find yourself tempted to follow the herd, sit down and analyze if such investments can be linked to your goals. If it does, then, you may consider investing but if not, then, it may be best to stay away from such investments.
Tip #7: Diversify
You’ve probably heard the saying “Don’t put your eggs in one basket”. I always like that statement because it simply summarizes that idea of diversification.
When it comes to investing, never invest all your money in one particular industry or type of investment. You can always diversify your investments by buying or going into the stocks, real estate, business, among others.
You need to diversify for a couple of reasons. One, you need to diversify in order to spread the risks associated with every investment you have. Second, you need to diversify investments between liquid and non-liquid investments because you’ll never know when you need to pull one or some of them out from the market.
Third, you need to diversify because your investments may serve different purposes such as retirement, college education for your kids, etc. This means that you may need to pull out some of the investments early while some may need to stay in the market longer. Basically, you have different needs that have to be addressed in different timeframe. These needs cannot be satisfied by investing in one fund or type of investment.
There is a value in diversification. When one investments goes south, your other investments may go up or remain flat, which will help your portfolio recover. There is no sector that is fully shielded against risks. Every sector and every type of investment can be exposed to risks and diversification of investments can help in spreading out those risks into different types of investments.
Tip #8: Be flexible
Your investment goal should not be set to stone. Your situation now may be different from your situation 5 or 10 years from now. This means that you need to be flexible when it comes to investment goals.
Recognize the fact that your situation can or will change in the future. You may be single for now but will have a family 5 years down the road. In such case, it is necessary for you to make changes to your investment goals or decisions.
Recognize the fact that some of your investments may end up not aligning with your goals. In such case, be open to make changes in your investment strategies. Once you recognize such changes, take time to learn what other alternative investments you can put your money into as substitutes for your current investments.
Tip #9: Buy constantly (applicable to stock market investments)
Don’t buy investments once because you just don’t know if those investments are priced at their lowest or their highest. It’s a better investment practice to buy constantly and consistently instead of doing a one-time buy. This is where the concept of dollar cost averaging strategy comes in.
The dollar cost averaging strategy minimizes the risk between the initial investment and current market value of the investment over a long period of time. This strategy dictates that you invest constantly at predetermined times.
The idea behind this strategy is to invest consistently without regard to the fluctuations in the prices of the stocks or funds. In my opinion, the best part of investing consistently is that you get to buy stocks when the prices are low, high, and/or in-between.
This strategy will allow you to potentially buy stocks when their prices are lower.
Unfortunately, you’d also get to buy stocks when the prices are high. The reality is it’s hard to determine when a stock will tank or rise. But with this strategy, you can reduce the risk of buying stocks when the prices are high because you are buying at different times and not at one time.
Tip #10: Learn from your mistakes
Your mistakes will be your best teacher moving forward.
In investing, you’ll learn that not all the things will go your way. You may find yourself making mistakes that can or will cost you money. But use these mistakes as a learning tool to improve and become a better investor.
You need to understand where you made mistakes. Once you learn and understand such mistakes, you will better position yourself in making better decisions.
A lot of people tend to only see the end of the tunnel but not the tunnel itself. When it comes to investing, always make sure that you know the risks and rewards and that you keep in mind your ultimate goal. It’s easy to get sucked into the commotion that goes on in the marketplace but it’s always in your best interest to be rationale so as not to lose your perspective.