Investing principles are fundamental guidelines and strategies that investors follow to make good informed decisions so they can achieve their financial goals.
These principles help individuals navigate the complex world of investing while minimizing risks and maximizing potential returns. Here are some of the most important ones that you should consider adopting.
Investing Principles
#1 Set Clear Financial Goals
Before investing, establish clear and achievable financial goals. Here’s a post that summarizes common financial goals to help get you started.
Determine your investment time horizon, risk tolerance, and objectives, whether it’s saving for retirement, buying a home, funding education, or building wealth.
#2 Stay Disciplined
Avoid making emotional decisions. Fear, desperation, FOMO, and greed lead to impulsive actions, such as panic-selling during market downturns or chasing after hot investment trends and buying too high.
Stick to your investment strategy to avoid these pitfalls. The markets are volatile because of other’s emotional reactions. Being consistent, level headed, and disciplined is essential for successful investing.
#3 Learn and Do Your Research
Educate yourself on the different assets classes and industry sectors. Avoid investments that confuse you or that seem too complex. Conduct a thorough analysis of each asset and assess current market conditions.
Do your research and stay informed about the investments you’re in or considering. Doing this and sticking with what you understand can help you make good informed investing decisions.
#4 Have A Long-Term Perspective
Investing with a long-term perspective allows you to ride out short-term market fluctuations and benefit from the power of compounding over time. Assets perform best over extended periods.
Take a look at the 30 year chart of the S&P 500. Knowing that markets trend upward in the long run helps you navigate those short-term emotions of FOMO and fear.
#5 Diversify Your Portfolio
Spread your money across various asset classes and individual investments within each class. It’s risky to have too many similar assets especially in the same market sectors.
Diversification reduces the impact of any single investment’s poor performance on the overall portfolio. This is a vital technique for risk reduction.
#6 Allocate Across Many Assets
Asset allocation is about determining how much money you want to have in each asset. As of right now my portfolio is allocated across 14 different investments.
I like to think about this in terms of what percent of your portfolio is in one vehicle. I tend to do between 5% and 10% depending on the asset and it’s fundamental analysis.
#7 Practice Risk Management
Know your risk tolerance and invest accordingly. Different investments carry varying levels of risk. Generally higher returns signify higher risk, but not always.
It’s essential to find a good balance between potential returns and the risk level. You’ll have to decide if each investment has the right risk-return tradeoff for your investing objectives and risk tolerance.
#8 Avoid Trying To Time The Market
Trying to predict when to buy or sell based on market fluctuations is challenging and can be risky.
It’s better to set pre determined limits thresholds and focus on your long-term investment plan. Avoid the impulse to make frequent changes based on short-term market movements.
#9 Use Dollar-Cost Averaging
If you have a lump sum to invest but are concerned about market timing, consider using dollar-cost averaging. This is a strategy involves breaking your investment into equal parts over a set period of time.
This averages out your buy-in price and mitigates the risk of investing a lump sum all at once during a potentially volatile market.
#10 Reinvest Your Earnings
Instead of taking income distributions, consider reinvesting them back into your investments. Reinvesting dividends and interest accelerates the growth of your portfolio.
Compound interest can significantly boost your returns over the long term. Make sure you have DRIP turned on so reinvesting is done automatically.
#11 Minimize Fees and Costs
Pay attention to investment fees and expenses, as they can significantly impact your overall returns. Different assets may carry different fee structures. Prioritize cost-effective investment options when you can.
#12 Monitor and Rebalance Your Portfolio
Reevaluate your investment portfolio regularly to assess its performance and ensure that it remains aligned with your financial goals and risk tolerance.
Life circumstances and market conditions can change. Make adjustments to your holdings or investment strategy as needed.
#13 Avoid Overtrading
Frequent buying and selling of investments can lead to higher transaction costs and potentially lower returns. Avoid unnecessary trading and stick to your long-term investment plan.
Remember that dividend stocks have an added benefit from price dips. Because you’re able to reinvest at a lower entry price, you can pick up a higher number of shares to increase your next dividend.
#14 Stack Benefits When You Can
Dividends and interest are high priorities for the assets that you choose. But if you can invest in assets that are currently undervalued, you can get the added benefit of appreciation once the asset returns to its true worth.
Likewise, if you can invest in a company that exhibit a strong potential for above-average growth in earnings and value over time, you’ll get growth along with dividend payouts.
#15 Monitor News, Economic, and Market Conditions
Stay informed about economic trends, market conditions, and changes in the financial landscape. While you should avoid emotional trading, you still need to be aware of broader economic indicators.
Keep up with news on the companies that you’re invested in. These two things will help you make more informed decisions and avoid unnecessary risk.
#16 Keep Tax Implications In Mind
Investments have different taxation. For example, dividends aren’t taxed at the same rate as capital gains from buying and selling assets.
Also consider the tax implications of trading using retirement accounts versus non retirement accounts.
To Sum Things Up
Following these investing principles can help you make good decisions and increase the likelihood of achieving your financial objectives over time.
Keep in mind that this is a list of general tactics. As you gain experience you’ll be able to make adjustments and develop your own effective strategies for successful investing.
