By creating an investment plan based on goals and risk tolerance, diversifying your portfolio, and taking a long-term approach, you can maximize returns while minimizing your risk. Following these golden investing rules can help you grow your wealth.
When you start investing, it can be hard to know if you’re doing it right. The sheer amount of information can feel overwhelming, and there’s no one path to financial success.
But there are some basic rules and guidelines to follow to achieve your financial goals. Here are 10 golden rules to use as a foundation as you build your own personal investing plan.
Make a plan
The first rule of investing is to create a solid strategy that aligns with your financial goals and risk tolerance. A common error beginner investors make is not crafting a clear plan before jumping into the market.
Before you do anything else, take the time to identify what you want to get out of investing. Are you working towards a specific goal, or are you just looking to build long-term wealth?
Next, consider your risk tolerance. Are you able to stomach risky investments that may have larger returns? Or do less risky investments make you feel more confident?
Once you have these factors in mind, research the best allocation and assets to reach your goals and diversify your portfolio.
By setting clear goals and regularly reviewing and adjusting your strategy, you can maintain discipline, make more rational decisions, and react better to any surprises that come your way.
Remember, investing is a marathon, not a sprint.
Invest only what you could lose
Investing can reap great benefits, but there is always risk involved. You never know what could happen in the market, so it’s important to protect your financial well-being and invest only what you feel comfortable losing.
That means building a solid savings fund before putting your money into the stock market — you should aim to have between three and six months’ worth of savings in a highly-liquid, low-risk savings account.
You should also generally avoid investing money you may need later for your monthly bills. That way, you aren’t tapping credit cards or taking on debt to cover an emergency expense.
This doesn’t mean you need to limit yourself completely, but rather be realistic about what you can afford to lose if things take a turn for the worse. By following this rule, you can invest more confidently, knowing that you have set yourself up for success.
Diversify, diversify, diversify
Risk will also be a part of investing. But the key to minimizing that risk is through diversification, or avoiding putting all of your investing eggs in one basket.
By spreading your investments across various industries, sectors, and asset classes, you’re lessening the likelihood of any one particular event having a major impact on your portfolio.
If an investor puts a majority of their money into a single company or investment, their entire portfolio may face steep losses if the company performs poorly. Even if the asset has a promising future, external factors such as market conditions and industry trends can impact its performance.
Diversifying can provide a sense of security, better prepare you for market volatility , and help you reach your financial goals. It also allows you to take advantage of different industries and markets.
Make interest work for you
Compounding interest has the power to truly transform your financial future.
When you invest money, you earn interest on it. The next year, you’ll earn interest on the original amount invested and the interest you earned the year before, and so on.
In other words, it’s interest on top of interest — meaning that the longer you keep your money invested, the more it will grow over time.
Compounding interest is a little like a snowball effect, gaining momentum as time goes on.
Understanding the power of compounding interest lets you harness the full potential of your investments. To make it work for you, invest regularly and consistently — even small amounts can make a big difference over time.
Tip: Be patient! Resist the urge to withdraw your funds prematurely, as compounding interest takes time to accrue meaningful returns.
Avoid trends & stay the course
It can be tempting to jump on the latest viral trend that promises huge returns. Thanks to social media, it’s hard not to feel like you’re missing out on the fun (and profit) by not investing in the latest meme stock or digital asset.
There’s actually a term for this — herding, which is the tendency for investors to follow the actions of others rather than doing research and making an independent decision. Herding can lead to poor investment choices and (in some cases) losses.
Think instead of investing as a game of patience and strategy.
While it’s certainly possible to strike gold with a trendy investment, more often than not, these trends fizzle out just as quickly as they appeared.
Focus on long-term investments that have proven track records, and avoid investing based on rumors, speculation, or your coworker’s Tweets. By sticking to this rule, you’re more likely to see steady and sustainable growth in your portfolio over time.
Buy low, sell high
The age-old rule “buy low, sell high” still holds true — the goal is to purchase assets at a lower price and sell them for a higher price to make a profit.
While it may seem simple, implementing this strategy requires discipline, patience, and solid knowledge of market trends.
Many investors make emotional decisions and panic when the market fluctuates, causing them to buy high and sell low.
One aspect of this is the idea of loss aversion, where we feel the pain of losses more powerfully than the pleasure of gains. As a result, we are more likely to avoid taking risks that could lead to losses, even if the potential gains outweigh them.
For investors, this can mean missing out on opportunities for higher returns or selling a stock at loss to avoid future damage, without considering if it’s more beneficial to ride it out.
It’s often impossible to buy or sell at the perfect price, but doing proper research and aligning your decisions with your goals can help you.
Let behavioral finance principles guide your decisions
Every investor will be affected by their emotions when investing at some point.
Around two-thirds of investors regret impulsive or emotionally charged investment decisions.
Making sound financial decisions is critical to achieving long-term wealth and success.
Behavioral finance recognizes that people are prone to cognitive biases and emotional influences that can lead them astray from rational decision-making.
Letting behavioral finance guide our decision-making can help you better understand the drivers of your behavior and make better financial choices.
One way to do this is by understanding how much risk you’re willing to take on with your investments. You can learn your risk tolerance and capacity for risk using features such as eToro’s advanced tools and risk scores.
Certain investors are unable to handle the market’s volatility and the ups and downs associated with more risky transactions. Other investors may need stable, consistent interest income.
Knowing your risk tolerance can help you build a portfolio that reduces that amount of emotion you’ll experience when making investing decisions.
Keep your investments for the long haul
Investing in the stock market can be a rollercoaster ride with its ups and downs. To achieve success, it’s often better to ride it out and play the long game.
Avoid market timing, which adopts a short-term thinking on what should be a long-term view. It’s very difficult to accurately time the market and make a consistent profit.
Holding onto your investments and weathering the turbulence increase your chances of significant returns.
There are times when stock prices decline and your portfolio value decreases, like in a bear market. But, over a long period of time, the market will likely rise. The S&P 500, for example, has an average annual return of 9.82%.
Concentrate on a strategy that may provide long-term returns and allow your assets time to mature. Investing for the short term may not provide you with enough time for your money to grow.
Evaluate your strategy regularly
Change is constant — maybe you have a new goal to save up for, or you’ve gone through a life milestone, or recent economic news is shaking the market.
While it’s important not to react to everything, it is important to review your portfolio regularly to make sure you’re moving towards your goals.
This means taking the time to evaluate your current portfolio, assess your goals, and make any necessary adjustments to ensure you’re on track.
Over time, your initial portfolio allocation may become unbalanced, as some assets will gain value and others will lose value as the market goes through ups and downs. If left unchecked, this can lead to a higher risk than you intended.
Rebalancing involves adjusting your asset allocation back to its original targets to ensure you maintain your desired level of risk exposure. By rebalancing, you’re ensuring that your portfolio stays on track with your investment goals.
Stay up to date with investing news
Keeping track of the latest trends, companies, and investment strategies can make all the difference in your portfolio’s performance.
With the fast-paced nature of the financial markets, it’s essential to stay informed about any changes that could impact your investments. By reading financial news and staying current with the latest investment trends, you can make more informed decisions and potentially increase your returns.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments.
This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
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