Investing is simple and not complicated. There are some basic principles that can guide investors to reach their financial goals effectively. Investments are an essential aspect of wealth creation and money management. Initially, choosing the right investment, deciding where to invest and how much to invest can be challenging. But with time, investors will gain a better understanding of the investment market.
It is important to note that despite following strict rules and discipline, investing always involves risk, and you may end up getting back less than what you invested. Here are 10 important rules that every investor should know:
1. Conduct thorough research
Don't rely solely on information found on the internet. Verify the credibility of the information by cross-checking it with multiple sources. Most people tend to be biased towards the cryptocurrencies they own and can only speak positively about the coins in their portfolio while criticizing others. Try to understand the pros and cons of cryptocurrencies objectively.
2. Define clear goals
Knowing your financial goals and the time frame in which you wish to achieve them will help you stick to your investment strategy. For instance, if you have long-term goals such as saving for your children's education or retirement, you may be less likely to invest before reaching those goals.
3. Don't invest in what you don't understand
Before investing, make sure you thoroughly understand the investment by researching it. For example, funds issue a Key Investor Information Document (KIID) or Key Information Document (KID) that explains the fund's operations and fees. Read this before investing. If you are investing in individual projects, make sure you understand the company's operations and future plans for profitability. In the cryptocurrency market, projects also have documentation such as white papers and roadmaps. Study these before investing and follow the project's social media to stay updated on the latest news and investor sentiment.
4. Diversify your portfolio
This age-old rule is more relevant today than ever. Diversifying your investments across different asset types and regions reduces dependence on a single investment or region. If one investment underperforms, other investments may make up for the losses, although there is no guarantee.
5. Higher returns come with higher risks
The lure of high returns may be tempting, but it usually comes with higher risks. Consider your risk tolerance when making investments. You may opt for lower-risk investments with lower returns or take on higher risks for higher returns. Remember, no investment is without risk, and there is always a chance of getting back less than you invested. If you still wish to invest in a high-risk, high-return asset, do so with a small portion of your total investment.
6. Long-term investments do not always guarantee high returns
Before investing, determine what level of profitability you expect from the company or project. The company or project's longevity is not the sole indicator of success. Capitalization can double with the right efforts, even if it takes several years. The goal should be expressed in terms of profit percentage, not investment period. There is always a possibility of the value of assets returning to its previous values or the company shutting down.
7. If it seems too good to be true, it probably is
Beware of highly speculative investments that seem too good to be true. Don't follow the crowd and invest just because others are. For example, many investors invested in Bitcoin in 2017 when its price rose, but its value fell by half a month later. Those who panicked and sold at the bottom lost a fortune.
8. Income reinvestment or cost averaging can boost returns
The DCA strategy helps reduce asset volatility and eliminates the need for constant monitoring. Instead of opting for a quick return, consider reinvesting your earnings to purchase more of your investment, which has the potential to appreciate in value and increase your overall profit. This is known as compound interest where your earnings themselves generate returns. However, keep in mind that reinvesting income instead of receiving it as cash also increases the risk of losing the investment or experiencing a decrease in its value. If you have subscribed to Automatic Dividend Reinvestment (ADR), for example by investing in shares directly, you will not be able to control the price at which you will buy additional shares, which could be low or high.
9. Regular Portfolio Review and Rebalancing
As markets and investments change constantly, it's crucial to regularly review your portfolio to stay on top of your investments. Your initial asset allocation can sometimes become unbalanced, so rebalancing is necessary to restore the desired balance. For example, market fluctuations can change the percentage of your investment and cause an imbalance in your portfolio. By rebalancing, you can ensure that your portfolio stays aligned with your goals and reduce the risk of having too many assets of a certain class. This is done by buying or selling certain investments to return to your desired asset allocation.
10. Avoid Timing the Market
It may seem ideal to buy investments just before they appreciate and sell before they decrease, but predicting the movement of the stock markets is near impossible. Attempting to time the market can result in making unwise investment decisions at inopportune times. Instead, consider a buy and hold approach, which helps maintain a long-term commitment to your investments and reduces the likelihood of making panic decisions during periods of market volatility.
In conclusion, these investment strategies can help you make your money work for you and ensure a secure future. If you feel that the potential reward does not outweigh the risk, investing may not be suitable for you.
It is important to note that despite following strict rules and discipline, investing always involves risk, and you may end up getting back less than what you invested. Here are 10 important rules that every investor should know:
1. Conduct thorough research
Don't rely solely on information found on the internet. Verify the credibility of the information by cross-checking it with multiple sources. Most people tend to be biased towards the cryptocurrencies they own and can only speak positively about the coins in their portfolio while criticizing others. Try to understand the pros and cons of cryptocurrencies objectively.
2. Define clear goals
Knowing your financial goals and the time frame in which you wish to achieve them will help you stick to your investment strategy. For instance, if you have long-term goals such as saving for your children's education or retirement, you may be less likely to invest before reaching those goals.
3. Don't invest in what you don't understand
Before investing, make sure you thoroughly understand the investment by researching it. For example, funds issue a Key Investor Information Document (KIID) or Key Information Document (KID) that explains the fund's operations and fees. Read this before investing. If you are investing in individual projects, make sure you understand the company's operations and future plans for profitability. In the cryptocurrency market, projects also have documentation such as white papers and roadmaps. Study these before investing and follow the project's social media to stay updated on the latest news and investor sentiment.
4. Diversify your portfolio
This age-old rule is more relevant today than ever. Diversifying your investments across different asset types and regions reduces dependence on a single investment or region. If one investment underperforms, other investments may make up for the losses, although there is no guarantee.
5. Higher returns come with higher risks
The lure of high returns may be tempting, but it usually comes with higher risks. Consider your risk tolerance when making investments. You may opt for lower-risk investments with lower returns or take on higher risks for higher returns. Remember, no investment is without risk, and there is always a chance of getting back less than you invested. If you still wish to invest in a high-risk, high-return asset, do so with a small portion of your total investment.
6. Long-term investments do not always guarantee high returns
Before investing, determine what level of profitability you expect from the company or project. The company or project's longevity is not the sole indicator of success. Capitalization can double with the right efforts, even if it takes several years. The goal should be expressed in terms of profit percentage, not investment period. There is always a possibility of the value of assets returning to its previous values or the company shutting down.
7. If it seems too good to be true, it probably is
Beware of highly speculative investments that seem too good to be true. Don't follow the crowd and invest just because others are. For example, many investors invested in Bitcoin in 2017 when its price rose, but its value fell by half a month later. Those who panicked and sold at the bottom lost a fortune.
8. Income reinvestment or cost averaging can boost returns
The DCA strategy helps reduce asset volatility and eliminates the need for constant monitoring. Instead of opting for a quick return, consider reinvesting your earnings to purchase more of your investment, which has the potential to appreciate in value and increase your overall profit. This is known as compound interest where your earnings themselves generate returns. However, keep in mind that reinvesting income instead of receiving it as cash also increases the risk of losing the investment or experiencing a decrease in its value. If you have subscribed to Automatic Dividend Reinvestment (ADR), for example by investing in shares directly, you will not be able to control the price at which you will buy additional shares, which could be low or high.
9. Regular Portfolio Review and Rebalancing
As markets and investments change constantly, it's crucial to regularly review your portfolio to stay on top of your investments. Your initial asset allocation can sometimes become unbalanced, so rebalancing is necessary to restore the desired balance. For example, market fluctuations can change the percentage of your investment and cause an imbalance in your portfolio. By rebalancing, you can ensure that your portfolio stays aligned with your goals and reduce the risk of having too many assets of a certain class. This is done by buying or selling certain investments to return to your desired asset allocation.
10. Avoid Timing the Market
It may seem ideal to buy investments just before they appreciate and sell before they decrease, but predicting the movement of the stock markets is near impossible. Attempting to time the market can result in making unwise investment decisions at inopportune times. Instead, consider a buy and hold approach, which helps maintain a long-term commitment to your investments and reduces the likelihood of making panic decisions during periods of market volatility.
In conclusion, these investment strategies can help you make your money work for you and ensure a secure future. If you feel that the potential reward does not outweigh the risk, investing may not be suitable for you.