There are several approaches to investing, where to invest and how much to invest. Every investor should find their own system and follow it.
Investing approaches differ primarily due to the chosen asset class, risk appetite, and tolerance.
This article brings out eight golden rules of investing, which are the fundamental rules every investor should follow.
The essential thing in the investing process is to get started. Getting started seems like a super obvious rule, but it is still worth mentioning. Learning and reading about different investment options is a significant first step. The second “first” step would be to start investing money somewhere. Many people stay in the “learning phase” too long. Actually, investing real money will drastically help you with the learning process.
Knowing your financial objectives and how long you want to invest will help you stay to your plan. The first thing to ask yourself is the purpose of investing. Is it saving for retirement, is it for passive income, is it for your children etc. When the first objective is confirmed, you can choose the asset classes.
There are several different asset classes to choose from and variations of those asset classes. In this article, we keep it simple, so the traditional asset classes in 2022 are:
Borrowed money always has a cost, which is commonly expressed as interest. This interest rate will eat into your profits, and no matter what happens, you’ll have to pay back the initial amount with interest at some point. To maximize your market success, never borrow to purchase; instead, save first and then invest with your own money.
Diversification is an excellent rule for the traditional investor. Accumulating various stocks from different sectors will help you diversify your portfolio. Also, investing in other asset classes will help you diversify and protect your capital from unexpected market fluctuations.
Investing should not be considered as “get rich quick, “but instead steadily increasing your capital over a period of time. Short-term investments usually have too much “market noise, ” which is not a good friend for investors and can result in loss.
Investing in companies you love and use can also make investing fun. For example, owning Nike, Starbucks, or Apple stocks makes purchasing their products more fun and also logical. You are directly supporting the stocks you own. So when you are buying your next Starbucks Mocca-latte, you are potentially helping its stock gain value. It has quite a nice ring to it, doesn’t it?
Dollar-Cost averaging is a significant and widespread investment strategy, where investors spread out their investment purchases over time.
The most traditional way for Dollar Cost Averaging is to invest every month in the same asset classes, no matter the price.
For example, investor Martin has 1000 USD to invest every month. Apple is his favorite company, so he invests 50% of the whole budget to Apple – 500 USD/per month.
The following table is a simple example of how dollar-cost averaging works:
*This is an educational example and does not reflect accurate historical market movements or prices.
|Stock||Purchase price||How many shares?||Average purchase price||Profit/loss|
|APPLE (january)||177 USD||2.8||177 USD||0 USD|
|APPLE (february)||173 USD||2.9 (total 5.7)||175 USD||-11.3 USD|
|APPLE (march)||162 USD||3.1 (total 8.8)||170.4 USD||-74.2 USD|
|APPLE (april)||140 USD||3.6 (total 12.4)||161.6 USD||-267.8 USD|
|APPLE (may)||125 USD||4 (total 16.4)||152.7 USD||-453.4 USD|
|APPLE (june)||177 USD||2.8 (total 19.2)||156.3 USD||+398 USD|
In hindsight, Martin started to invest in Apple when the price was relatively high. The following months the price kept falling, but Martin did not lose his nerve and kept on investing because short-term price fluctuations do not bother him – he is in it for the long term.
So the first five months, Martin’s portfolio was negative, but since Martin kept on investing even when the price fell, he got stocks at a lower price. In June, when the Apple stock price reached the 177 USD level (where Martin started), he gained 398 USD profit, which is almost 13.3% profit in 6-months.