TL;DR
- Study the asset you plan to invest in; fundamental and technical analysis can prove to be useful. And before investing, always make sure the potential profits outweigh the probable risks.
- When you do invest, develop a consistent investment process and be disciplined to reap maximum returns. And don’t forget to diversify.
- Another golden rule of investing- buy low, sell high. Buying doesn’t necessarily mean a lump sum investment. Dollar-cost averaging is a useful strategy to employ.
- Rather than timing the market, long-term investing is the way to go. Also, don’t forget to implement stop losses on your investments to limit risk.
- And, of course, regularly assess and rebalance your portfolio to reflect the market fluctuations and your financial goals.
Introduction
There are a lot of stories circulating on the internet about how investing has created millionaires and turned lives around. However, they often fail to represent the risk involved with investing, given the market volatility. A bunch of macro and micro economic factors, such as inflation, deflation, government policies, etc., affect the value of money you invest, so there are a few rules of investing to keep in mind.
Not to mention — without the proper knowledge, you have the probability of incurring loss rather than gaining profit.
To help you avoid such a situation and make profitable trades, here are the top ten golden rules of investing. Let’s get into them one at a time!
How Can One Invest Safely?
“The most important quality for an investor is temperament, not intellect.”
– Warren Buffet
In Warren’s words, controlling your emotions is the prominent factor to focus on if you don’t want to lose money in the market. Never ever let your emotions get in the way. You may feel an investment position may turn out the way you want it to be, but ask yourself– do the fundamentals support it? If they don’t, do not hold on to a position with hope.
Investing your money is a risky venture, and the top players always play by rules and regulations to avoid obstructions in the way. To invest safely, your priority must be to consider your goals, the financial instruments you are comfortable investing in, and your risk appetite. Additionally, consider the current market situation, whether it’s a bullish or bearish market, and the overall economic condition.
By following the basic rules of investing, you can easily make prudent choices in investment and bring stability to your portfolio.
10 Valuable Rules of Investing to Know
Without further ado, let’s take a look at these 10 essential rules of investing that every investor should adhere to for a successful run in the market.
Rule 1 – Learn before you invest
Before you start investing, follow this rule of investing as a bible. Without proper understanding, you’ll not be able to invest successfully. It is similar to giving a test without studying. By gambling or assuming, you may get a few marks, in this case, a few profitable trades. However, that will not take you a long way.
Losses in the market can be brutal. It may lead you to lose not only your money but also your motivation. Thus, make it a practice to study the financial asset you are planning to invest in. With time, learn fundamental and technical analysis to make your research analysis game stronger.
Rule 2 – Always stay at a breakeven point
This is one of the most timeless rules of investing. If your investment money doesn’t grow, make sure that its value doesn’t fall either. This sets you up for a guilt-free breakeven financial position and retains your funds for a lucrative deal.
“Rule Number One: Never Lose Money. Rule Number Two: Never Forget Rule Number One”
– Warren Buffet
This advice by the world’s most significant value investor stresses avoiding losses in your portfolio. Invest money, but after conducting your research, to increase your chances of profit. You cannot always predict the outcome of your investment. Thus efficient decision-making is crucial. You should consider both the pros and cons of an investment. If the risks outweigh the profits, let that deal pass.
Rule 3 – Be consistent
Maintaining consistency is, without a doubt, one of the most important rules of investing. The best investors develop a process and follow it religiously without any deviations. Consistency in investing refers to maintaining track of your investment goals.
If you are saving for retirement and have decided to save Rs. 10,000 every month, do not miss that. Eventually, your Rs. 1,20,000 will generate compounding interest, and you will enjoy more profit. Develop an investment process for yourself and stick to it.
Rule 4 – Be disciplined
To succeed in life in general or your financials, you need to have a certain level of discipline. This includes making rules for yourself, such as following the budget, avoiding unnecessary expenses, saving money, etc., and following them.
Savings are a good source for fulfilling investment needs. When you keep saving and investing, you’ll develop disciplined habits. In the beginning, it may be tough for you to save money, but once you witness the sweet fruits of your investment, it will motivate you to do better.
Rule 5 – Buy the dip
When you buy a stock, you are called its full or partial owner. It will have an impact on your money. Thus, do not treat investment like a gamble. When markets are up and stocks are hyped for their performances, it is common to feel a FOMO and invest in them. However, prices often fall after making highs. Thus, if you buy at a high, you have to wait for a really long time to close your position and make a profit.
Contrary to that, when markets are fearful and prices are falling, typically in a bear market, buy the stocks with stronger fundamental values at reasonable prices. When the markets are normal again, you have profit in your pocket. There is a very popular quote for this market trait, “Be fearful when others are greedy, and be greedy when others are fearful.“
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Rule 6 – Dollar-cost averaging
This rule of investing says that you should buy an asset gradually. For example, you plan to buy 15 shares of Company ABC. Initially, if you buy 5 shares for Rs. 1000 each, your cost would be Rs. 5,000. The next 5 shares, you buy at Rs. 900, totaling Rs. 4,500. Lastly, you purchase the last 5 shares at Rs. 800 during a market downturn, costing you Rs. 4,000.
Like this, you buy 15 shares for Rs. 13,500. However, if you purchase all stocks at one time at Rs. 1000, you would have to pay Rs. 15,000. Dollar-cost averaging helps you average your investment cost. In this case, you saved Rs. 1500. These investing rules make a huge difference when you have a fat investment amount.
Rule 7 – Don’t try to time the markets
Experts recommend to not always try to strike the right timing when buying or selling an asset. Time in the market is more important than timing the market. That essentially means that you have to be consistent and not jump in and out frantically to make a profit. Instead, focus on the long-term goal of creating wealth.
Veronica Willis, an investment strategy analyst at Wells Fargo Investment Institute, says, “The best and worst days are typically close together and occur when markets are at their most volatile, during a bear market or economic recession. An investor would need expert precision to be in the market one day, out of the market the next day, and back in again the following day.” If you are a novice investor, timing the market requires a lot of expert skills, which you may not have. Thus, be patient and stay invested for the long term.
Rule 8 – Learn to take risks but with stop loss
Investment and risk go parallel. If you are investing, you cannot avoid risks. Taking risks is needed to earn profits; however, you must know what risks you are undertaking. A better way to take risks is to decide your risk-to-reward ratio. This ratio helps you identify how much risk you can take to earn a certain level of profit. A risk-to-reward ratio of 2:1 means you can risk Rs. 2 for every Rs. 1 gain.
Based on your comfort zone, decide on a risk-to-reward ratio. Also, never miss putting a stop loss on your trades. Stop losses help you limit your risk in the time of market downfall. You may lose money during the market fall, but stop losses would limit that loss compared to naked trades (trades without a stop loss).
Rule 9 – Regularly assess and rebalance your investment plan
Portfolio rebalancing is an essential aspect of investing. Having a robust investment plan is necessary. But that doesn’t mean you have to follow it blindly. Market situations don’t stay the same. The fluctuations should reflect in your portfolio with appropriate asset allocation. Thus, tweak your portfolio as per your changing needs with time.
Portfolio rebalancing should be done at least once a year if it still fits your goals. However, do not alter your portfolio too frequently. Regular assessment and rebalancing help you keep your portfolio in line with your retirement goals and achieve them.
Rule 10 – Don’t put all your eggs in one basket
Having a diversified portfolio is essential. No matter how great a stock you have invested in is, the future cannot be predicted. Having multiple options to invest in hedges you from the risk of price depreciation and helps you maintain a balanced portfolio.
Diversifying your assets is not difficult. If you are in your 20s to 30s, you have a longer time frame for your long-term goals, and investing 60% in equity can benefit you. You can invest 30% in debt and the rest 10% in alternative assets to make a risk-adjusted, diversified portfolio.
Final Words
Investing money is more like an art than about calculations. You learn this art over a period of time and get better with every mistake. In the beginning, investing money can be hard to get a grasp on, but once you know the drill and follow these golden rules of investing, we are sure that you will create value for your money. Additionally, it’s important to not let the temperament get to you and be patient about investing your money.
FAQs
1. What is the KISS rule of investing?
KISS means “Keep It Simple, Stupid.” This rule of investing means that your investments are not required to be complex. The most successful investments are the most simple and less stressful. You should avoid investments that are too complicated to invest in to avoid confusion and the probability of losses.
2. What percentage of my income should I invest?
While this answer varies for each individual, the 50:30:20 rules of investing can be considered standard practice. This rule signifies that you should spend 50% of your salary on needs, 30% on wants, and the remaining 20% of your salary should be saved and invested. It would help you balance expenses, savings, and investments.
3. What is rule 100 of investing?
Rule 100 of investing helps you find the ideal asset allocation ratio for your portfolio. This rule says that you must subtract your age from 100 to find the amount of equity you should include in your portfolio. For example, if your age is 30, then 100 – 30 = 70 is your ideal equity investment percentage. Equity investment works better when the investment goals are long-term.
