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Work for money, save some of that money, invest your savings to then make money. The instructions themselves are straightforward and clear as to the outcome, use your savings to make money. But going from Point-A to Point-B isn’t very clear or as easy to interpret without more information and guidance. The best thing to do is read to gain a better understanding of how the financial world works. Once you do have an understanding of how investing works, it’s a good idea to have some rules in place to keep yourself on track.
Probably a month or two after I started investing it became clear to me, that like most things, I need guidelines and rules to follow to help my investing strategy be successful. So I did what any reasonable person would do, I went to Michael’s to get a dry-erase board and markers to draw up what I call the ‘Investor Board’.
You can find lots of lists online about rules to follow to help keep yourself honest and true to your goals, that’s what I did. My rules are comprised of two things, first my own experiences (what I thought I needed to work on and what I found worked well) and from reading other people’s lists. You don’t need to reinvent the wheel, if you find something that’s useful for you, don’t be afraid to apply it. At the time that I made my rules I hadn’t read a single book on investing but I do think I managed to come up with a good set of rules that I believe are essential, even after educating myself.
- Due Diligence and Research — I believe this is the most important rule (although they are in no particular order). As an investor I think it’s vital to know what you’re investing in. During your investing lifetime there’s going to be periods of extreme ups and downs, times of uncertainty and volatility so the best thing you can do is to be confident in your investments. During times of decline you need to be able to say ‘I believe in this company, I believe in this stock, I know it’s value’ and not just hope for things to turn around. Knowing what’s happening with the market is important too, sometimes you’ll just have a bad day/week/month, even with promising stocks.
- Don’t Panic Buy or Sell — buying or selling out of panic or ‘the fear of missing out’ causes people to make irrational decisions and will cause transaction fees to add up. On top of that, you’re going to make poor investment decisions by selling a declining stock for most likely a stock that is increasing that will probably reach a resistance level and start to decline. Don’t invest in a company that you’ll panic over with every percent it drops.
- Stay Calm and Level Headed — whether you’re having a good day or a bad month, it’s important to stay level headed. If you get too cocky you’re likely to make mistakes and if you get too down on yourself you might start questioning yourself and your plan. It’s easy to let the investor psychology take a hold of you, so remember what you’re doing and why you’re doing it.
- Protect Profits — I think a good habit to get into is selling small portions of a stock as it increases in price. What goes up must come down, so don’t miss out on your profits. By selling a portion of your shares in a company as the price increases, you’re guaranteeing profit by taking them, and reducing the number of shares exposed if the price reaches as peak and starts to come back down. Shares are sold every second and prices change that quickly too.
- Limit Losses — something to establish prior to investing is your price targets, both high and low. If the price gets to $X sell for profit and if it drops to $X sell to limit losses. If you set this up prior it will help you be able to rationalize your decision to sell. Also, If you think a stock was a good price at $X and it drops significantly below that, the price could be more appealing granted that nothing has changed about the company (make sure to do your due diligence first).
- Won’t Win Every Trade — you have to put your ego aside and face that fact that there’s going to be bad investments. Even if you do your homework, are confident in a company and see a bright future for it, the stock price may still go down. There’s a lot of factors that can move a stock price and it’s important to be able to identify when it’s time to cut your losses. Every investor has made a poor investment, don’t let anything tell you differently.
- Always New Opportunities — don’t feel like you need to make a move right now or you’re going to lose out. There always has been and there always will be new opportunities in the stock market. There will be moments when you feel anxious or stressed but it’s important to stay calm and stick to your plan. Don’t make a decision based on the fact that it is an opportunity, make your decisions on the fact that it’s the right opportunity.
- Small Gains = Big Profits — don’t plan on hitting a grand slam on every investment you make (you just won’t). Consider that a good return over a year would still be in the single digits and if a stock has been going well for you, be logical, might be time to sell and let your profits add up. If you get too greedy you leave your money vulnerable to mistakes and the randomness of the stock market. Just like saving a small amount of money regularly over time adds up, so does profits.
- Be Humble — this one is definitely the most dangerous rule. If you’re having a good period in the stock market, chances are you’re not a genius or the greatest investor ever. It was at best a good investment or most likely a lucky investment. There are so many unpredictable variables that impact the markets and your ‘skill’ might be the one the matters the least. If you get into the mindset that you’re the greatest you’re going to end up making more decisions that’ll cost you in the end.
- Stay Discipline — it sounds fairly simple to just stick to your plan, but it is so tough. Looking back since I came up with my ten rules, very few times have a ever actually stuck to the rules and played an investment like I planned. Always stick to your plan, even if you feel like sticking to it will be wrong, like you’re missing out on a huge investment. Chances are that feeling is just that Taco Bell you had at lunch and is nothing more.
Other things that I do include on my Investor Board are: My Goal (to keep me true), Weekly Plan (for stocks I’m anticipating news) and Watch-List (which includes different companies and sectors I have my eyes on for possible investing opportunities). Initially when I got started I had a variety of stocks, but I’ve since decided it’d be better (less stress and time consuming) for myself to have a more focused portfolio on stocks I know well rather than a lot of stocks I kinda know.
These are the rules that I really try to utilize when I’m making investment decisions, I don’t have a great track record of sticking to my rules but maybe you’ll have better luck. Just because you have rules doesn’t mean everything is going to work out in your favour. There’s always more to know and an infinite amount of new information to learn. Never make an investment based on someone else’s opinion or recommendation, make sure you have your own. Building good habits is important to execute anything efficiently, especially when you’re dealing with your own money and your financial future. Don’t risk it all on a whim or a dream of an eagle that has some significance or something. Do your research, stay true to your goal and what you’re trying to achieve and maybe just maybe everything will work out better than you thought was possible. This article isn’t telling you to invest, or how to invest, but I’m just simply sharing the rules that I’ve created for myself help me be successful, whether it works or not is still up in the air.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.