Follow the rules!
Investing success rule no. 1 – Have the right investing mindset
Investing is more about learning yourself and less about knowing everything about the company you invest in. You do not need to be super intelligent to succeed in the investing arena. You just need to have qualities such as patience, discipline, persistence, humility, willingness to admit to mistakes, and the ability to ignore general panic.
You need to have an investing plan in place and stick with it. Outline your investment goals, determine how much you plan to invest and define your risk tolerance. With a solid plan in place, no matter what the market is doing, you should be ready to weather anything the market throws at you.
Focus on the big picture, keep ambitions realistic, and recognize your mistakes. Many investors think investing is a heavily involved process, with a constant buying and selling of stocks to lock in profits or tweak their portfolio until perfect. Many times, the best strategy is to do nothing. Simply buying good companies, setting a realistic target, and holding onto them is an effective way to become wealthy. Get comfortable in doing nothing. You will make a lot of mistakes throughout your investing journey. We all did, and we continue to do. Learn from them and move on quickly.
Do not try to predict or time the market. You cannot. No one managed to always be ‘out’ during bad times and ‘in’ during the good times. Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves. ‘Buy high, sell low!’. Catching the tops and bottoms is a myth. That is the message we hear all the time. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what is happening to the companies in which you have invested. Think long-term!
Know what you can afford to lose. Investments come with risk. If you want to get more involved in investing, become aware in advance of how much you can afford to lose. The truth is you might lose it all — and short-term trends do not always bounce back quickly. Your income is related to your philosophy, not to the economy. If you cannot convince yourself that when the market is down 25 percent, you are a buyer, then you may find it challenging to make a decent return. Everyone has the brainpower to make money in stocks. Not everyone has the stomach for it. If you are susceptible to selling everything in a panic, you ought to avoid stocks. Invest for the long run and money you do not need. More than you want significant returns, you must want to be financially unbreakable. And you will be unbreakable because you will be able to stick around long enough to overcome market difficulties.
Leave emotions at the door. This is the most important and the most difficult. Those you invested during the 2020 Covid crisis, you remember the sinking feeling you got after seeing your portfolio get chopped. It does not feel good. Unfortunately, this same feeling was used by many investors as a justification for getting out of the market. While this may have secured their portfolio from losing any additional money, it also meant they missed the bull run right after. The point is that our emotions affect our investing behavior. Emotions have no place in investing. Moving your money out of fear or excitement because of a big news story could cause you to miss long-term gains. Ignore the latest dire predictions of the newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling. Ignoring the herd will help you materialize your financial goals.
Investing success rule no. 2 – Maintain an emergency fund
An emergency fund is money set aside to cover any of life’s unexpected events. This money will allow you to live for a few months should you lose your job or if something unexpected comes up that will cost a fair chunk of money to cover. Think of it as an insurance policy. This money can then be accessed quickly and easily if some unfortunate event occurs. Emergency funds create a financial buffer that can keep you afloat in a time of need without relying on credit cards, high-interest debt, or liquidating investments. Having a robust emergency fund gives you freedom and peace of mind. No one wants to live one paycheck away from not being able to pay the rent or one car breakdown away from not being able to get to work. An emergency fund is critical in attaining victory over your investing.
A general rule of thumb of how much money your emergency fund must have is at least 6-9 months of living expenses if you have no dependents relying on your income, 9-12 months if you have dependents or work in an unstable industry, and 3-5 years if you are retired and living on a fixed income.
An emergency fund can take the form of cash in the bank, a fixed deposit, or even an investment at a market index (for the riskier of you). When saving, draw a line between emergencies and everything else. This money needs to be kept where it can be quickly accessed and where it will be safe. There is always something coming that you do not expect and will cost you money. Being prepared is half the victory. By failing to prepare, you are preparing to fail.
Investing success rule no. 3 – Invest funds you will not need during your investing journey
Never ever invest money that you cannot afford to lose! Absent a lot of surprises, stocks can be relatively predictable over ten to twenty years. As to whether they will be higher or lower in one or three years, you might as well flip a coin to decide. Even the best businesses out there can fall and stay down over three or even five years. There are all kinds of complicated formulas for figuring out what percentage of your assets should be put into stocks, bonds, or any other superficial instrument. Still, we have a simple one, and it is the same for Wall Street as it is for us, the retail investors. Only invest what you could afford to lose without that loss affecting your daily life in the foreseeable future. Always remember this rule and never violate it!
It makes sense to review the family budget before you buy stocks. For instance, if you have to pay for a child’s college education or buy a house in two or three years, do not put that money into stocks. Maybe you are an older person who needs to live off a fixed income or a younger person who cannot stand working and wants to live off a fixed income from the family inheritance. Either way, funds towards those goals should stay out of the stock market. If you have been living paycheck-to-paycheck up to this point, your first savings goal should be to create a safety net rather than investing in the stock market.
Having a safety net aside mainly does two things for investors. First, it gives a source of cash for expenses without selling stocks at potentially challenging times (and challenging times will eventually come someday, if not tomorrow). Second, if a big investing opportunity arises, having cash lets you buy stocks at the perfect moment.
To invest in stocks successfully, you need to have a long-time horizon. Whether stocks rise or fall over short periods has little to do with a company’s fundamental business strength. If you invest with the idea of taking money out next month or even next year, you are mostly just gambling.
Investing success rule no. 4 – Never borrow money to invest
Get out and stay out of debt! It is hard to make a case for being financially independent when you owe money to banks or other people. You should aim to get out of debt (especially high-interest debt) as soon as possible. Paying down your debt can protect against rising interest rates, reduce any psychological debt burden, and increase your future disposable. You must commit yourself to eliminating your credit card debt, student loan debts, and house mortgage. That is not an overnight solution to your current debt problems, but it will set you in the right direction. And once you get out of debt, stay out and never come back! There is no such thing as “good debt” when you are trying to achieve financial independence.
Borrowing money to invest in stocks will put you in a very fragile position. You will be at the whim of lenders who can force you to sell at massive losses. We have seen investors borrow money and accelerate gains in the short term, only to get wiped out entirely when the market declines. Borrowing money to invest might be something that some sophisticated traders may engage in, but for long-term investors, managing their accounts adds risk, complexity, and costs – something we would strongly advise against.
Investing success rule no. 5 – Have always a long-term investing horizon
Long-term investing is key to maximizing the growth potential of your savings, no matter how big or small your savings are. Time is your closest friend! The holding period matters a lot, both on the probability of positive returns and the average return. Try not to invest in short-term stock prices. Invest in the long-term success of businesses. The shorter-term of a viewpoint that you have, the more you are dependent on actual luck.
History has shown that while the market is unpredictable in the short run, the real return is made through long-term buy-and-hold investing. Your investment risk drops the longer you stay invested. Hold stocks for a year, and you are at the mercy of the market’s madness. Five years, and you are doing better. Ten years, and there is a good chance you will have gains. Hold them for twenty, thirty, or forty years (do it like Buffett), and there will be no period in history when stocks produced an average loss. In fact, the worst you have done over any thirty years in the past is to increase your money 2.5 times after inflation.
Long-term investing will take you out of the daily/monthly worry of whether you made the right choice or not, removing emotions from the equation. You give yourself a long-term mindset, but at the same time, you are allowing the business to perform. Although not every investing thesis will come true in five/ten years, you are improving the potential that the business will have a chance to develop the way you hoped. Investors who regularly pay attention to the stock market tend to handicap their chances of success by trying to time the market too frequently.
Plenty of people claim to have great ideas on how you can get rich quickly. You will not find any offering ideas on how to get rich slowly. Yet, those more realistic investing ideas are much more likely to be successful in the long run. One of our central tenets is that you should look to be a long-term investor. When you buy a stock, you should aim to hold it for five years or longer (if not forever!). That does not mean there will not be occasional exceptions to that rule. For the most part, though, having a long-term perspective aligns your thinking with the company’s fundamental business rather than with its stock price. If get-rich-quick schemes tempt you, do not feel bad. It is hard to be patient. But when it comes to investing, playing the long game is the best way to ensure that you will be in the best possible position to be a winner in the end.
Putting your money in long-term rather than short-term investments is easier to do, will make you sleep better at night, provide dividend appreciation, tax advantages on capital gains, and save you transaction/advisory costs. The longer you remain invested, the lower the costs, and the longer your money will grow.
The stock market will always attract people who are in a rush to build wealth but eventually will build wealth for people who are not in a hurry. It attracts the impatient but rewards the patient. The market gives the most to the ones that trust it long-term. Quick returns are overrated, and slow compounding is underrated. Remember that significant return is not in the buying and selling but in the waiting. The biggest threat to long-term returns is your behavior in the short-term. Hold strong and invest long!
Investing success rule no. 6 – Invest on a systematic basis
Financial markets rarely move in a straight line. Stock prices move up and down, sometimes on an hourly basis. By feeding your money into investments over a period of time, you invest across a range of prices. You effectively pay the average price over a fixed period, which results in smoothing out the ups and downs of the market.
Invest regularly and try not to time the market. Eliminate the ‘when to buy’ by scheduling frequent monthly, quarterly, or annual purchases. For every raise you get in your income, first, save and invest, and only then increase your lifestyle. Make investing a bill in your budget, pay yourself first and rest assured your future self will thank you. Investing consistently will improve your financial situation and help you experience less financial stress in your investing decisions.
Investing consistently means adding a steady amount to your investments regardless of what the market is doing or worrying about what to sell. You are not chasing winners just because they have already won; in other words, you are not ‘chasing performance.’ This will help you become a disciplined investor. It takes emotions out of investing and avoids delays in putting your money to work. Develop a process and be consistent!
No matter what your goal is for your investments, you will get there faster by adding to your portfolio systematically.
Investing success rule no. 7 – Diversify your portfolio
Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. A diversified portfolio contains a mixed type of investment to limit exposure to any single asset or stock. A broad mix of stocks could be the passport to growing your wealth over many years. And just as importantly, having a diverse portfolio could be your ticket to getting through a stock market crash with fewer scratches.
You cannot escape risk. If there were no risk, there would be no return. So, unless you are professional investors and know ‘extremely’ well what you are investing in, we firmly believe that diversification is the only way investors can minimize their portfolio risk and preserve wealth. The financial life of every one of us is different, hence the risk tolerance. However, investing in multiple companies across various sectors will help you mitigate risk and ride out any inevitable market fluctuations. Consider dividends as a way to add some stability and international stocks (or US-listed companies with internationalized revenue streams) to bring a little bit of balance to your portfolio. ETFs can also get broad-based market diversification. You can also keep a little cash on the sidelines of your portfolio to put it to use when the stocks do fall.
It can be tempting to buy just one or two stocks, figuring that if they hit the big time, all of your money will earn the maximum possible return. However, having the correct quantity of stocks in your portfolio provides a good balance between maximizing return and minimizing risk. The key to a diversified investing approach is to find a happy balance between risk and return. This ensures you can achieve your financial goals while still sleeping calmly at night.