It’s no doubt that everyone wants to make money, and when they have it, they strive to preserve its value, whether it is in the form of assets, or they want it to grow. As we look into investing our money, we tend to make very silly mistakes that affect our decisions in a negative way. We tend to panic when the markets are escalating, and we end up getting carried away. As an investor, it is important to take a step back and really scrutinise the options available and the decisions we make in order to avoid some of these mistakes. In this article, we are going to look at ten timeless rules for investors.
Develop a strong portfolio
Often the strength of a portfolio lies in diversification, and this is one of the most common tips for investors; however, it is also quite commonly overlooked. The majority of investors tend to carried away into focusing on one particular asset or stock. Diversification is important to consider when building a portfolio because it spreads out the risk leaving little to no room for any negative surprises. The truth of the matter is that it is no currency, stock, asset, sector, etc., that will do well all the time. Therefore, through diversification, you will ultimately reduce risk and yet enjoy good investment returns.
Control your emotions
A lot of investors that have been burnt know how dangerous emotions can be when it comes to investing. Sadly, when you are seeing the value of investment continuing to rise, you can’t help but be attached. The thrill that comes with a growing investment pushes us to stick to it and aggressively want to add to winning positions. Usually, when a market is doing well, and there’s a lot of positivity around it, it doesn’t seem like a particular stock will ever go down; hence investors feel that they need to hold more of it at that moment. However, successful investors know to regularly take profits, reassess and balance their portfolio. Failure to do this may result in overexposure and market correction.
Take the gains and take the losses
It is not easy to time the market and even expert investors struggle. A lot of individuals try to ignore the bad days or avoid them, but even missing a single good day can be just as bad. Most fail to realise that it is in the bad days that there is more volatility and with this volatility comes to the largest gains. Therefore, to be a successful investor, you need to be able to handle smooth sailing but not panic when it becomes a bumpy ride. Don’t attempt to play the market looking for a quick profit!
Obscure the noise
One of the main targets for the financial industry is to get investors to make a move. Several brokerage firms and investment houses benefit more when investors purchase or sell shares. The motivation behind this often results in a lot of noise in the market without clear differentiation between the good and the bad information. Therefore, good investment advice is hard to come by because the supposed financial experts seem to be more focused on promoting themselves. So as an investor, keep an eye out for the false or bad information, become a master at drowning the noise.
Acknowledge the three stages of Bear markets
Common patterns can be found in both a bear market and a bull market action. Typically a bear market first has a sharp sell-off and in the course of a bear market prices will usually go down to about 20% plus. Bear markets also often involve whole indexes, and such a market is usually a result of weak or deteriorating economic activity.
The second stage is called a sucker’s rally. In this case, investors are often encouraged by quick spikes in prices to jump into the market before a sharp correction is made to the downside yet again. Such rallies don’t last very long as they are usually a result of hype and speculation. Therefore the suckers are the investors as they may buy into the short-term highs, but end up losing in the long run when asset prices go down.
The final stage is the painful grind down to more reasonable valuations, where a state of depression takes over regarding overall investments.
Be careful of forecasts and expert opinions
If everyone who intends to buy, buys, and everyone who wants to sell sells, there are no more buyers and sellers. Therefore, when forecasts and market experts are telling you to buy or sell quickly know that everyone is frantically doing just that; and at the end of it, all nothing remains to buy or sell. So by the time you want to join in the fun, something else is about to happen.
You will find Bull markets more enjoyable than bear markets.
During a bull market, prices rise exponentially so of course, investors will enjoy watching their profits increase. Short sellers, however, may not enjoy it as much; this is because their assets are borrowed in the hopes that the price will drop.
Be independent of the herd mentality
Following the masses is never good advice for any aspect of life, and that includes investing as well. Rather than following what everyone else is doing, investors should strive to make their lead of the economic and business cycle. One investing constantly is that all economies are recurrent. Concentrating on the cycle will help investors determine different outlooks of a variety of assets and markets to avoid risk when the economy starts to indicate intensity right before a recession. Investing counter-cyclically is the way to go.
The longer you stay in the market, the better the chances of success
To be a successful investor, you need to have the patience and discipline to wait for it up and forgo short-lived hype. It is something that is very difficult to do but concentrating on performance on each calendar year as opposed to looking at things from a long-term perspective may destroy you. An investor aims for long-term success more than anything, and always keep that as the foundation of your thoughts.
Establish your investment objective and stick with it
Always make sure your objectives are very precise, ask yourself questions like, what do I want to do with my money, what do I want it to do for me?, how much risk can I handle?, when do I need the money back? Am I investing for value preservation or do I want my money to grow? And so on. Such a question will help you solidify your objectives and stay true to them no matter what comes along.
Investing is not a piece of cake, but when done right, you might get the bigger piece of the cake and enjoy it too! It takes a lot to become a successful investor, just remember not to get caught up in the market news fluctuations and don’t let emotions get the best of you; try not to follow the masses and take note of all the other tips listed above.