Before you start investing, you need to remember Warren Buffet 2 rules “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
If you ever thought that investing was like a game of roulette, you would be wrong. Investing isn’t about chance and luck but about knowing the foundations and rules to make the right decisions at the right time.
We have 6 guiding rules for anyone who wants to start investing. Get to know them and let them guide you.
- Draw a personal road map & set your goals
- Know your risk tolerance, and embrace it.
- Invest in what you understand
- Start investing as early as you can and invest for the long term
- Invest regularly
- Diversify your portfolio
Consider these rules your best friend, and make sure you get back to them before taking any investment decisions.
Setting goals and understanding risk
# 1 Draw a personal road map & set your goals
No one gets a six pack without a proper plan (we wish, right?) Investment works just the same. To begin your investment journey, you need to know why you are investing— your goals. And, how much you’ll be investing—your budget.
# 2 Know your risk tolerance, and embrace it!
Like every rollercoaster ride, the higher the fall the more exciting and thrilling the experience. Investment risk and return are the same. The higher the risk you take, the higher the return. It’s important to know your risk tolerance and prepare to embrace the downfalls if they happen.
When you come to choose an investment, choose one that matches the return you’re looking for, then you have to understand the risk that comes with it. If you’re prepared to take that risk, then the investment matches your risk profile and is a good fit for you.
Investing in what you know, and committing
# 3 Invest in what you understand!
Investing in a stock means owning a part of the business. So, when you look for a stock to invest in, look for businesses you believe have everything in place to grow in the long run. Let’s call this a good business.
The first step now, is to set your criteria for what a good business is. For example, solid operating profits and a healthy growth rate could be a good business for you. And, visionary management and an innovative product could mean a good business for me.
The second step is to understand the businesses you invest in, inside out—How they make profit, what affects their stock price, and what the future looks like for them.
The third step is to closely monitor these companies, so you can make sure that step one and two stay relevant to you and your goals.
Don’t leave things to chance, this is not a gambling game. Always, make sure that your investments make sense to you.
# 4 Invest as early as you can, and invest for the long term
The long term doesn’t mean investing to make money to go on a trip in the summer, but for a beach house in 10 years. Ben Graham says, “In the short run, the market is a voting machine. Yet, in the long run, it is a weighing machine.”
In the short run news, and emotions may cause stock prices to go up and down. But, in the long run the price of the stock depends on the fundamentals of the business. So, be patient and don’t let the ups and downs fool you. And, remember this is not a get rich quick scheme.
Warren Buffet said, “Nobody buys a farm based on whether they think it’s going to rain next year, they buy it because they think it’s a good investment over 10 or 20 years.” Let’s all try and follow in his footsteps. And, as you might think the earlier you start investing, the better. The longer the time you spend investing, the more you’ll end up with.
# 5 Invest Regularly
Trying to time the market by buying and selling orders around market price movements most likely ends up being a fool’s errand. Some people could have good sense but it’s impossible to know when markets will go up and down.
The best way around this is to have a regular investment cycle, it could be with every paycheck. So, you invest a small amount of money consistently every month. This way you take the emotion out of investing, it’s not a hit and run, it becomes a regular routine.
Stock market trends are usually upward trends on the long run, if you stick to your regular investment cycle—you’ll end up buying more shares when prices are lower and less shares when prices are higher.
# 6 Diversify Your Portfolio!
You know the old saying, “Don’t put all your eggs in one basket”? This applies perfectly here. When it comes to investing, spread your investments over different asset classes and sectors. This way you soften the blow of losing money if one of your investments flop.
Let’s say you’ve invested in an oil company and oil prices just went down. But, you’re not worried – because you also invested in a cement company that is now making it big because of lower production costs caused by the dip in oil price.
Your stocks will go up and down, let’s try and make sure they don’t do it together.
The next level of diversification is spreading out your investments over different asset types. You can invest, stocks, bonds and gold all together. Different assets won’t be affected by the same factors and you get to strategize differently for each.
Now that you know the rules of thumb when it comes to investing, you can start making some money.