Investing in the stock market can be tricky, especially in times such as the recession we are in now. So therefore, I am going to go through the 10 most important rules when investing in the stock market.
Rule 1) Never invest based on emotions.
Never invest based on emotions. This is because when we are emotionally fired up, we usually tend to make decisions that turns out to be mistakes in the future. An example of this could be if a stock goes down in value, and you end up panicking and selling for a loss, just to see that three months later the stock ended up going multiple percent higher, reaching a new all-time high.
Moreover, if you invest based on emotion you shouldn’t be investing at all. Investing requires logic, technical analysis and facts. These I just mentioned are what should be the decider if you are investing in something or not. If emotions are used when investing, then it is basically gambling because you are deciding to spend your money on something that can tragically shrink in value, only because you have an emotion that steers you in the direction of believing you will get a great return.
One of the greatest investors on the planet even said, “If you get emotional when investing, you shouldn’t be investing at all”. Just, don’t invest based on emotions or else it’s going to end very badly for you and your portfolio…
Rule 2) The principals of selling.
It is great to know what to invest in, but it is even more powerful to know when to sell and buy, or know when to be greedy, and when to be fearful. Below are the principals you should follow when selling.
– You need the money. This one is an obvious, if you need the money because an accident happened and you need to pay for something, or if your business is going bankrupt and the money might save the business, or anything that falls in the category of “Absolutely needing the money”. Then it is okay to sell but remember that if you have another way to solve the problem then it is probably best to go with the second option. Usually, you don’t won’t to sell your long-term position of investments. But if you crucially need it, then it is okay.
– The investment is going bankrupt. Again, knowing when to be greedy and when to be fearful is extremely powerful, especially in the world of investing. So, if you have been a good investor and done your research, then you would know if your investment were going bankrupt, and when you know or are very certain that the company, you’re investing in is going bankrupt then obviously you should sell instead of going down with the company. Now, when doing your research about the company than you should usually block out every opinion of wall-street analysts and make up your decision based on all the facts you can find.
– You find a better opportunity elsewhere. This can be a tricky one, because if you do find a better opportunity elsewhere then you should sell if the current investment is at least even, meaning you don’t lose any money in the current investment. And most of all, you never sell if none of the principals above account for the investment, and you never sell for a loss. Only if the principals above account for the investment. Warren Buffett once said, “The first rule of an investing is, don’t lose money. And the second rule of an investing is don’t forget the first rule.”
Rule 3) Always do your research
I have probably mentioned this in every single article I have written about investing. Doing your research on every investment is so incredibly important. This is because when you do your research on an investment you will most likely find out if the investment is a good investment or not, and you will have much more knowledge on the business and the market you invest in. And, when I say do your research I mean, look through the company numbers, look through the management in the company, understand how the business works and how it stays profitable, and most importantly understand the market the company/market is in.
Rule 4) Invest according to your goals
Everyone should have goals. And when it comes to investing it is especially important to have goals. Because if you don’t, you end up investing for returns without end, which can be dangerous.
Knowing your financial goals and what timeframe you are investing over will help you stick to your strategy, for example you will be much less tempted to sell your investments short if you know and believe in your investment strategy, plan and goal.
Rule 5) Asset allocation and Diversification is key.
Assest allocation and diversification is so important, because obviously as long-term investors we don’t not want to have all the eggs in one basket.
what I mean by asset allocation is Always refinancing the portfolio at the end of the year or every 1.5 years, but not so much longer than that. this is because if for example my stocks and index funds grow significantly, then at the end of the year I will sell of enough to even out the number again so every asset has the percentage of money that they shall have according to my portfolio diversification, (I will usually sell of at least over 1 year, for tax advantages.) Basically, I will sell of x if it has grown out of proportion and reinvest it into my portfolio again following how much percentage each asset should have.
The reason for this is because I want to stay diversified. Easily explained, if I invest 1 dollar into 5 different stocks, my portfolio will be diversified with 5 stocks, and 20% of my money into each stock. But if one stock goes up to 2 dollars, then my portfolio wouldn’t be as diversified as before, it would instead be diversified over 5 stocks, but the one stock doesn’t hold 20% anymore, it holds now 30% of my portfolio. And the other stocks hold only 17,5% of my portfolio. So that is why It’s important to refinance your portfolio, to stay diversified through time.
Rule 6) Always invest for the long run.
What I mean by this, is that investing for the long run is always better and almost always more profitable than investing for the short term, and when you invest for the short term (considering only investing over the span of max 1 month) it’s not investing, it’s more like gambling…
Moreover, when you invest for the long term, then you can tap into the most powerful investment strategy there is, Compound investing.
Another reason why you should invest for the long term is that you won’t be caught up in the emotions caused by daily swings in the stock market. Essentially, you won’t get emotional if the stock goes down or up, because you’re in it for the long run.
Just remember this when investing.
“Time in the market, always beats Timing the market” -Keith Banks
What this essentially means is that long term investing is better and more profitable than short term investing. It is said that over 95 percent of day traders (Short term investors) lose money in the end. This is merely because they try to time the market perfectly for a good ROI (return on investment). But since no one knows where the stock is going to go (at least regular people) then you are essentially gambling with your money and hoping for the stock price to go up.
It is far better to invest for the long run because you will probably get an essential ROI on your money, if you choose the right companies to invest in. Moreover, if you choose to invest in the long run, you will also be paid every time there is a dividend payment from the company, that is if you invest in companies like McDonalds, JP Morgan, Coca-Cola etc. Which pays a good dividend per stock.
Rule 7) If it seems to good to be true, it probably is.
If you’re on social media, then you will probably come across those stock market gurus who tell you to buy a stock or option because you’ll get a 100-1000% return. And most of the time you should stay away from those people and their opinions because, what their pitching you is bullshit and their probably just trying to sell you something. And usually, it will only end with you losing your money (If you listen to them). Most of the time, these gurus are full of shit, and what their pitching is not going to get you what they said it will get you.
When you decide what opportunity to invest in, you should 100% do your research before investing, because if you don’t it will only end up costing you (If you are not lucky). And if you don’t do your research on investments, then you are only gambling.
At the end of the day, taking advice from some stranger should not be enough for you to be totally invested in an investment, always do your research before you form an opinion and decide to invest or not.
Rule 8) Never invest in something you don’t understand.
Its gambling, always do your research before investing, do everything in your power to understand a subject before you invest. (Example: Its idiotic to invest in for say a company that is in the farm industry, if you know nothing about the company or the market which the company is in.) If you do invest in something you don’t understand or a business you don’t know/understand, and you only assume how they make money, then you are essentually gambling.
Rule 9) Be aware of the fees.
Fees can be tricky, and after my experience usually funds are good at hiding their fees. Therefore, I would recommend that you check every aspect of the investment your putting money into. And just a reminder: fees for funds and index funds should not be over 1%, if you are looking into a fund that has over 1% in fees combined then you should probably not invest into that fund.
You might think that 2-3% in fees are not that much. But when you look at it from the long-term viewpoint then it turns out to be a great deal, because not only can your long-term investments tap into the power of compounding, but fees can also do the same. Over time fees compound into an extreme amount of money which you could have saved if you had gone with a better option. If you are not conscious about how much you are paying in fees then your fees will eat on your returns, and you will lose money. End of story.
Rule 10) Don’t try to time the market.
It would be great to be able to time the market perfectly, for example buying a stock the day before it goes up 100 percent. However, this is far from reality. This is because no one knows whether a stock will go up or down. So, trying to time the market is not what you should be aiming for. You should rather invest for the long term, and instead ride the markets ups and downs, and invest every month/week, so you can tap into the power of compounding interest.
Long term investing is so much better because historically the stock market always goes up in the long term. So, it would be much better to invest for the long term, instead of trying to time the market. To finish this point, I would just say don’t try to time the market, because this strategy isn’t investing, its gambling…
Many people say that investing can make you rich, which theoretically speaking is true, but if we’re going to be honest, investing won’t make you rich. It’s the profession you do or the business you run that makes you rich, investing only takes that money and compounds it, considering you invest in the right ways. Moreover, just remember this: your profession makes you rich, investing makes you wealthy.
Thank you for reading.