Before embarking on the journey of investment, there’s a multitude of knowledge that investors need to grasp. However, adhering to some core principles can significantly aid in becoming a more proficient investor. Following these investment rules can help you better avoid the common mistakes often made by beginners.
Research before investing is indispensable, but even with in-depth exploration, there are deeper factors that could profoundly affect the long-term returns of your investment. If you’re seeking clarity on the “why”, “what”, and “how” of your investment choices, then our guide on the Golden Five Rules of Investing is for you. Abiding by these principles can greatly minimize investment errors.
Rule 1: Define Investment Goals and Targets
To understand “why to invest”, you must first determine your target investment return rate and the required time frame. These factors are crucial in the investment process. Once this question is answered, the next query becomes “what to invest in”, which means identifying which assets can achieve your goals.
Seeking high returns in a short period might warrant an aggressive investment strategy, albeit with higher risks. Such investment targets need to promise higher risk-reward ratios.
Conversely, if an investor has modest expectations for returns and a longer investment horizon, investing in lower-risk assets is advisable. The longer the investment period, the greater the potential for asset appreciation, aiming for long-term average returns.
Tip: The first step in investing is to take time for self-analysis to determine your goals and how much risk you are willing to take.
Rule 2: Plan
Ahead When considering “how to invest”, it’s critical to plan, determine your investment strategy, roughly identify the assets you want to invest in, and decide on the timing of purchases. Investors need to thoroughly understand the assets and their markets, be patient, not hasty, and recognize that not all positions will be profitable.
Tip: If you wish to practice investing in a risk-free environment, simulation accounts are the ideal way, allowing you to test investment strategies with virtual funds.
Rule 3: Diversify Investments
Each time you invest, the risk level of your portfolio increases. Therefore, during investment planning, it’s necessary to carefully consider and decide on the markets and assets you wish to invest in, i.e., asset allocation.
Experienced investors often apply risk management technique of diversifying their portfolio by buying a range of assets. Thus, if a small position falters, it has a minor impact on overall returns. Investing across multiple industries or geographic regions usually yields more stable overall returns.
Tip: Invest after researching different types of assets and markets, and only invest in instruments with known risk conditions. Before investing, ensure you understand the investment tool and that it aligns with your investment goals and risk tolerance.
Rule 4: Be Prepared
Risk management should be considered when planning investments, and becomes even more crucial once investment begins. The value of investment assets will always fluctuate with the market. Throughout this process, avoid emotional investing to not stray from your investment plan.
Tip: It’s imperative to remain calm in investing. The amount of capital invested should not exceed your capacity to bear losses. Also, retain some emergency cash for unforeseen circumstances.
Our economic calendar can help investors track news events that might impact asset prices, alerting them to upcoming announcements and more. While unpredictable factors like black swans and grey rhinos exist, most times, you can generally understand and prepare for upcoming situations. This preparation ensures you’re not caught off-guard by market fluctuations.
Rule 5: Continuously Learn
Investing requires keeping up with the times, meaning your investment direction and risk preference will inevitably change. Moreover, you might want to keep track of newly discovered investment trends. In this process, expanding your knowledge and skills can make you a better investor. For individual investors, cultivating a habit of continuous learning is a crucial means to achieving investment success.
Tip: Quality brokers offer their clients free research; some also provide social and copy trading. You can discuss ideas with other investors or set your account to copy others’ investment decisions.
Final Thoughts
Following the Golden Five Rules of Investing can make navigating market fluctuations smoother, assist you in devising plans tailored to your personal situation, demonstrate the benefits of re-evaluating and adjusting plans for the future, and help evaluate the possibility of achieving personal financial freedom.
