The rules of investing, ahhh, if I just knew what they were. Well today you can.
Whether you start with $100 or $10,000, as a beginner or experienced investor, it can be easy to get swamped with information overload and confusion.
To cut through the noise, I’ve put together these 10 quick rules of investing. Every investor should know these rules to avoid some of the biggest mistakes I see investors making!
Rule #1 – Think long game
I believe this is one of the most important rules of investing. Playing the long game rather than trying to time the market or day trade over the short term.
When you invest with a long-term mindset, you’re far more likely to be able to remove your emotions from the equation. This is SO important.
If the market jumps or dives (as the market tends to do!) you won’t be sitting on the edge of your seat with stress or wracked with indecision about whether to buy or sell.
Sticking with stocks over the long term allows you to ride out and recover from the inevitable market ups and downs – and sleep a lot more soundly!
In the last big market crash, it was reported that Warren Buffett ‘lost’ $26 billion. The thing is though, he didn’t ‘lose’ anything, because he never sold. By holding his portfolio, knowing he was in for the long haul, not only did the market return to the levels before he supposedly ‘lost’ $26 billion, but it went even higher.
Plan to hold your investment for as long as possible, decades should be your mindset.
Rule #2 – Spread your eggs between many baskets
In other words; diversify your investments.
This simply means holding a variety of investments in different market environments.
With your money spread between several different types of investments (asset classes), you’re more likely to reduce risk and maximise the opportunity of potential returns.
As well as investing across various asset classes, you can diversify by investing in multiple sub-categories within asset classes. I talk more about the benefits of diversification here.
Rule #3 – Match your investment time frame to your financial goal
Considering your time horizon is one of the rules of investing whether you’re a beginner or a pro!
Your time horizon is basically the length of time an investment is made or held before it is sold.
Generally, short-term investments are considered to have a time horizon of less than three years. While long-term investments are considered 10 years plus.
So, if your financial goal is to purchase a home in the next 5 years, you should opt for a more conservative investment choice. Whereas if you’re investing for retirement at 65, and you’re 27, your portfolio can carry more risk as there is plenty of time to recover from market volatility.
Rule #4 – Look at your big financial picture before you start investing
Before you start investing, you really need to get a handle on your current financial situation.
Are there other financial obligations you might put at risk by investing right now? Should you focus on paying off debt before you invest? Note however that this doesn’t mean giving up on investing, you can do both. How you split your available cash flow will be based on your priorities at the time.
Rule #5 – Don’t get bogged down in the details
Investing doesn’t need to be complicated. Seriously!
If you’re a beginner, start small and slow. Rather than picking an individual stock and getting overwhelmed by all the details, go for an ETF (exchange traded fund) or mutual fund.
ETFs are a great way for a first time investor to get into the market! The entry threshold is low, usually $500, fees are minimal and ETFs are designed to fluctuate with the market so there’s no risk of picking individual stocks that underperform or worse, go out of business.
Rule #6 – Keep tabs on your progress
If you’re a long term investor (hint – you should be!) there’s no need to be obsessively checking your portfolio every day. However keeping tabs on your progress is one of the rules of investing to keep you on track.
Once a month, or at least once a quarter, take a look at how your portfolio is performing and make any adjustments required.
You may move money between investments to keep your portfolio in line with the asset allocation you want.
Big life changes like marriage, having kids or getting divorced may also have you rethinking the amount of risk you’re comfortable with and adjusting your asset allocation accordingly.
Rule #7- Ignore scare tactics
“A market analyst is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”
I don’t think it’s a great idea to get caught up with what you read and hear on the news. Media outlets put out the dramatic headlines to get eyes on their platforms. An overload of information and sensationalism can lead to irrational, emotional decisions. Not a winning combination when it comes to your finances.
I’m not saying ignore everything you hear. Just be smart about the sources you trust when making the kind of decisions that will seriously impact the outcome of your financial future.
Rule #8 – Don’t try and beat the market
“It is not necessary to do extraordinary things to get extraordinary results.” – Warren Buffet
The fact is that beating the market consistently isn’t likely to happen for most investors who aren’t full time, knee-deep studying the investing world.
For most people, choosing more passive investing products that aim to match the performance of a specific benchmark (or “index”) as closely as possible is the way to go.
On the other hand, actively managed funds aim to beat the index.
The debate over active vs passive investing has raged forever but there is evidence to show that in the long term a passive approach can win.
Warren Buffet is a big fan of slow and steady wins the race. He has consistently chosen investments that beat the market over time, and that’s why Berkshire Hathaway shares are up approximately 2,400,000% since Buffett took over the company in 1964.
Rule #9 – Keep an eye on fees and taxes
Where possible, minimise the amount you pay in commissions and management fees.
The more you pay someone to look after your investments, the less you’ll have to invest!
I created Investing Bootcamp for this very reason. To help you gain the confidence to manage your own investments, rather than pay someone to do it for you.
You also need to consider the tax implications of any investment. Lower tax can help your savings grow faster, but it’s unwise to base an investment decision on tax benefits alone.
Rule #10 – Make investing a habit
One of the most important rules of investing? Be consistent.
Figure out how much you need to add to your portfolio per month to reach your financial goals and stay consistent with your contributions. Basically, stick with the program no matter what!
The best way to make investing a habit is to set up automatic transfers to your investment account.
The next class of Investing Bootcamp opens in just a few weeks. To get on the waitlist click this link and you will get advance notice of when we are open for enrollment.