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Investing is not easy. Much as we try to simplify, speak about it enough to help investors feel confident, it remains tough. There seem to be many paths to investing success and one is never confident about one’s choices. Investing can often be broken down into a few simple rules that investors can follow to be successful. But success can be as much about what to do as it is what not to do. On top of that, our emotions throw a wrench into the whole process. While everyone knows you need to “buy low and sell high,” our temperament often leads us to selling low and buying high.
Most investors place too much importance on trying to choose between specific shares and bonds. However, it is usually core principles that dictate the success or failure of any wealth building strategy.
These 10 rules outline the building blocks on which investors can create investment plans for long-term value accumulation.
One has to state that first and upfront. There are many stories of how people made money easily; some speak about stock trading as if it is the surest way to richness; and there is the lure of the sales pitch, the media hype, and promotions. Amidst all this noise, investing is a serious business that needs time, effort, perseverance, patience, knowledge, attitude and skill. Don’t remain irresolute and make ignorance a virtue. Begin small keep learning.
Get your asset mix right – if you get this wrong, nothing else matters Asset allocation is the key to meeting your objectives – it is often quoted that asset allocation explains 80- 90% of a portfolio’s total return. Investing almost always requires you to trade off higher expected returns with greater risk. The solution is getting the asset mix and amount of each asset right. Once you have decided on the mix that is right for you, stick to it, unless your circumstances change. A regular review with a financial adviser will allow you to address changing circumstances.
Sharply moving markets tend to correct sharply, which can prevent investors from contemplating their next move in tranquility. The lesson here is to be decisive in trading fast-moving markets and to place stops on your trades to avoid emotional responses. Stop orders help traders in two ways when asset prices move beyond a particular point. By determining a specific entry or exit point, they can help investors limit the amount of money they lose, or help them lock in a profit when prices swing in either direction.
Rebalance your asset mix to stay true to your tolerance for risk an asset allocation strategy must have a commitment to preserve its weightings. As time goes by and markets experience ups and downs, your portfolio will gain in some asset classes and lose in others, causing your strategic asset allocation and actual portfolio to fall out of sync; this means you need to rebalance.
When the market is down, investors often sell or simply quit paying attention to it. But that’s when the bargains are out in droves. It’s true: the stock market is the only market where the goods go on sale and everyone is too afraid to buy. As Buffett has famously said, “Be fearful when others are greedy and greedy when others are fearful.”
Since we all hate regret as an emotion, and since we have too many choices, we often end up with the second best. There always seems to be another investment, another strategy, another tactic that is doing better. But that pursuit can turn mindless. Worse it can put us in a place where we may choose inertia over action. Choose carefully after considering the merits of your investment strategy. Don’t question that decision too much and too often.
There is always a new story in town. There are fancy new products. There are new theories floating around. Consider what is going on, surely. But have a broader framework for what you are saving and investing for and what your needs are. Risk, return, diversification and liquidity are easily the most important cornerstones of your investment strategy and they alone will matter to your success. Learn the science and art of evaluation against these core ideas. Do not drop your defenses and invest against your known preferences because you fear you are letting go of an opportunity.
When everyone who wants to buy has bought, there are no more buyers. At this point, the market must turn lower. Similarly, when everyone who wants to sell has sold, no more sellers remain. So when market experts and the forecasts are telling you to sell, sell, sell—or buy, buy, buy—be sure to know that everyone is jumping on that bandwagon, so much so that there’s nothing left to sell or buy. By the point you jump in, something else is likely to happen.
Be kind to yourself. Do not assume that you are not doing enough, without considering your financial situation realistically. Saving and investing are habits you need to work on so they become part of your nature. The motivation to persist will naturally follow. Don’t give up before that transformation has happened.
Discuss strategies which can help meet your financial goals If you wanted to design your dream house, you’d call an architect. Similarly, if you want to design an investment portfolio that best fits your needs, call a financial adviser. Quality investment management advice is not cheap but making poor investment decisions is a lot more expensive. Financial advisers are experts in the industry and as such, their advice is well worth taking.