Managing investments can be tricky business, especially for someone who isn’t extremely knowledgeable about the market. With a wide variety of investment vehicles to choose from and an ever-changing market, it can be easy to get confused and lose track of what exactly you’re trying to achieve.
Whether you’re managing your investments on your own or working with a financial advisor, here are 10 investment principles to always remember.
1. Don’t lose money: This is the first and most important principle you’ll want to adhere to. After all, what’s the point of investing if all you’re going to do is turn losses, not gains? You’re investing to make money over time, so think carefully about your decisions to make that happen.
2. Understand your investment strategy: Not every investor approaches the market in the same way. There are multiple strategies of investing that can be employed, such as value investing or momentum. No matter which one you choose, the important thing is to truly understand the fundamentals of your investment strategy and stick to them.
3. Invest for the long term: While short-term investing can be tempting and sometimes valuable, investing for the long term will usually yield higher returns. The market sometimes takes time to move and even itself out, so jumping the gun with a short-term investment may lead to losses.
4. Portfolio diversification is key: How you allocate your assets will have a major effect on your long-term returns. You must pay close attention to how you manage your portfolio and think carefully about the allocation strategy you want to employ. Diversification protects you from market problems and minimizes risk (but don’t diversify too much!).
5. Put compound interest to work: Compound interest can yield amazing results in your investments, but only when you do it right. Don’t wait too long to invest, since compound interest needs time to do its work. And, make sure you’re reinvesting profits from those investments!
6. Accept market volatility: It’s just a fact—the market won’t always work in your favor. Don’t panic when the market declines and shifts. Instead, use these fluctuations to your advantage to buy assets at lower prices and hold out hope for the long term.
7. Don’t take risks with borrowed money: You shouldn’t be spending money you don’t have now on a chance of a higher return later. If it fails, you’ll not only have the loss of the investment, but you’ll still owe the borrowed money. Doing this is a good way to go broke quickly.
8. Create a margin of safety: An important part of investing is knowing how to identify investments that are mispriced so you can buy them at a bargain. Just because a stock or investment is cheap doesn’t mean it’s always of lower quality. Buying at a lower price creates a safety net for you—higher returns if it succeeds and lowered risk if it fails.
9. Don’t gamble: Every investment you make should be calculated, and you should fully understand what you’re investing in and why before you make the choice. Crunch the numbers and do your research to have a firm idea of what you can expect your investment to return. Always make informed decisions, not guesses.
10. Keep liquid reserves: You don’t want to pour all of your money into assets that aren’t liquid. While a balance is fine, ensure liquidity in some aspects of your portfolio so you can quickly access funds when you need them.
By following these simple investment principles, you’ll be better able to make sound investment decisions and hopefully yield more positive returns down the road.