There are many books about rules of investing. Below are the 8 rules which we have found to have stood the test of time.
Understand the Rules
To win “the game”, it is important to understand the rules before you play. Know the transaction fees, management fees, terms & conditions, regulations and restrictions before you start any investment.
Buy Undervalued Assets
Warren Buffett’s investing strategy focuses on buying assets when they are undervalued.
Undervalued is a financial term referring to a security or other type of investment that is selling for a price presumed to be below the investment’s true intrinsic value.
You can evaluate if a stock is undervalued by looking at the underlying company’s financial statements and analyzing its fundamentals, such as cash flow, return on assets, profits, capital management, to determine the stock’s intrinsic value.
Diversify Your Portfolio
The diversifying your investment assets can help you achieve more consistent returns over time and reduce your overall investment risk.
Assets are organised into classes such as cash, property, equities, and fixed-interest securities including bonds. Effective asset allocation will see your investment funds split across multiple asset classes to help balance risk and potential rewards.
In addition to balancing asset classes, many market experts also recommend balancing investments across different industry sectors. Typical sectors include financials (banks), communications (telecommunications), energy (oil and gas), commodities (iron and gold, etc), technology and others. You can help balance the normal ups and downs these sectors may experience, and their impact on your portfolio by splitting your investment portfolio across sectors.
No Emotions
When it comes to investing, the numbers are the most important thing. Focus on the Return on Investment (ROI) after taxes. Don’t be emotionally tied to your investments (eg. hold on to a property just because it has a beautiful garden).
Ride the Winners, Cut the Losers
Amateur investors often sell their ‘winning” investments too early, and sell their “losing” investments too late. Successful investors do the opposite. They are able to “ride the winners and cut the losers” because they practice strict money management and have tight control over their own investment psychology.
Invest Long-Term
In regards to investments, most people look at too short a time frame. They spend too much time stopping, changing, and searching for the next hot investment opportunity. When you analyze an investment, be clear on your objective and time frame. Don’t ignore an investment because you think its returns are not instant. Understanding that building wealth takes time and invest for the long-term.
Be Adaptable
Many investors fail to make money due to their inflexible investment strategies. To be successful, you must be able to adapt to changing market conditions.
Continue Learning
Always keep an open mind and continue to learn more to improve your psychology, money management, and investing.
