5 Important Thumb Rules of Investing
While you work for money, suitable investments make your money work for you. How you take control of your finances determines the growth of your wealth and additional income streams. Click here to read about the five golden rules you can follow while investing.
When asked about the most important investment rule, Warren Buffett, the world’s most prolific investor, was quoted saying: “Rule 1: Never lose money. Rule 2: Never forget rule 1.”
As inspirational as it may sound, the rule makes no sense. Everyone who invested, including Buffett, has suffered losses at one time or another. The whole point of investing in market schemes, be it an equity fund, a debt fund, or any other, is a particular risk attached. As an investor, it’s your responsibility to understand the market in-depth and park your money in instruments that align with your risk appetite.
However, that doesn’t mean successful investors follow no rules on their journey to creating wealth. These rules go beyond the basic “buy low, sell high” principle that everyone knows. This guide will tell you how to minimize your losses by discussing the five essential rules of investing in market instruments.
5 Important Investing Rules
Investment Rule #1: Make a Long-term Plan
Having a detailed plan before jumping into investing is of the utmost importance. You need to visualize your financial goals and be determined to fund them. The wisest course of action is to start saving early so that you can reap the benefits of compound interest. According to most financial experts, investors should start by investing at least 10% of their current earnings, with a minimum capital increase of 10% every year.
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Investment Rule #2: Be Patient
Knowledge and patience are two of the most significant traits to have while investing in market instruments. Before investing your money, you need to understand how a particular scheme works, how it has performed first, and how much returns it’s expected to yield. If you haven’t researched your portfolio well, you are likely to abandon it at the first sign of trouble, and panic-selling is a surefire way of losing money.
In the same vein, avoid jumping into investment fads. For instance, a lot of people might invest in cryptocurrency without taking the time to figure out how it functions. Therefore, while every investment instrument has its pros and cons, the important thing is for you to be aware.
Investing Rule #3: Diversify your Portfolio
Keep your portfolio simple yet diverse. Depending on your age and investment goals, the kinds of funds you choose will be markedly different from that of others. Allocating fixed amounts to multiple sectors such as stocks, bonds, commodities, real estate, mutual funds, and so on will help you weather the storm of volatility. However, indiscriminate investing can rack up fees that can potentially kill your long-term returns. The goal here is to find a balance between ‘too few’ and ‘too many’, so that you maximize your returns without complicating your portfolio.
Investment Rule #4: Take Stock of your Investments
As you continue to invest money with discipline and consistency, you’ll inevitably need to reinvest your dividends so the compound interest keeps growing. Rebalancing your portfolio is once every year is a recommended move that successful investors follow. This helps you stick to your gain targets while adjusting your asset allocation based on your risk appetite.
Investing Rule #5: Stay Calm
Lastly, and perhaps most importantly, remember not to be too hard on yourself in case your investments suffer a loss. Allowing emotions to drive your decisions can lead to losing more money or selling and buying too often, which can impact long-term results. Don’t obsess about having the perfect portfolio – it doesn’t exist. There will always be another investment or another strategy that’s doing better. Instead, focus on how to invest money in limited funds of your choice. Self-confidence and belief in your decisions are a must for success.
The world of finance and investments can be overwhelming even for the most experienced. However, with the help of consistent research and guidance from trustworthy sources, you can develop your knowledge about how to invest money and get a good grip on how things work.
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