Here is my take on the golden rules of investing, that will increase your chances of succeeding in your journey of investing.
The first thing I must say is diversifying. I know some horror stories of people, who only bought one or a few different stocks, because they seemed cheap at the time. In these stories, stocks didn’t perform so well, and they had to wait for break-even for years. Even that they eventually got to the break-even point, price vise, inflation had taken its own chunk of this money.
Diversify to different instruments, different stocks, different countries, continents, whatever comes to mind. Don’t keep all your eggs in one basket. The weight of different instruments doesn’t have to be equal.
For example, you could buy index funds with 40% of your investment money, put 10% into cryptocurrencies, 10% into gold, and the rest for what ever feels good for you. Therefore, if cryptocurrencies took a big hit, what we have seen in the past 5 to 10 years, that would only affect your portfolio with 10% of the weight.
It is also said that you shouldn’t over-diversify. I would say not to worry about over diversifying too much, since most of the time the problem is lack of diversification instead of over diversifying. Of course, this is just my view on diversification, and you should consider what kind of strategy suits you best.
2. Don’t try to time the market
Don’t wait for the market to tank. It could take years, even decades, and even if it eventually did fall, the price could still be higher than what you could have initially bought it for. Instead, for example, put some money for investments every month, every quarter or so. A little bit from every paycheck you get to build that long term wealth. Don’t look at the price, just stick to your plan.
The typical “It can’t go any higher” or “It can’t go any lower” is rarely the reality. It is really difficult to predict the highest or the lowest point of the market. Unless you have a crystal ball, of course. I haven’t found one yet, so I will just stick to my strategy of buying consistently.
3. Try to find good risk to reward ratio
It is said, that the bigger the risk, the bigger the reward. This is however, not always the case. There is no chance that the risk would always be correlated to the reward. There are opportunities for investors to find low risk investing opportunities that will still have good returns.
There are also very high-risk things you can invest on, that still aren’t proof of a very high return. So, third on my list is, find good risk to reward ratio.
4. Invest for long term
Investing isn’t something that will get you rich quickly. Most of the times at least. When investing, aim for building long term wealth. When investing for longer periods of time, compounded interest will also help you snowball your investments even further.
The prices shown at the stock markets rarely represent the real value of the stock. Sometimes they are overvalued, sometimes undervalued, but on the long term, their prices tend to be on an uptrend. At least if you look at the indexes, I mean, that’s the point of investing. Risking your money in order to get the rewards.
If your inner investor woke up, I have written other posts about investing as well. You can read them here. Have a nice day.
This is not investment or financial advice. When investing, there is always a chance that prices will fall or go to zero. Past performance of the markets is not a guarantee of future success.