Goals of Living
4 minutes read
What is the difference between two investors? The answer is a lot, they have different approaches, goals, and investing techniques. They also have similarities, one of them is to follow the golden rules of investing. In this article, I’m going to go through each rule and explain them so you can easily adapt them when you are investing.
As I have said previously in this blog, if you don’t have a map for where you’re going – how are you going to reach it? You need to know where you’re going to have a good start, or you’re going to be filled with doubt or make mistakes.
A good idea is to think about why you’re investing and how long you’re going to invest.
How aggressive do you want to be with your investing? I’m not talking about mood, but rather what kind of risk are you comfortable with. You can take safe investments such as low-risk index bonds but you’re probably not going to make a great return. Alternatively, you can invest a higher percentage in stocks, perhaps some new companies, or that you expect are undervalued.
A lot of people have tried beating the market, a lot of people have lost all their money on it. I don’t recommend it unless you have too much money in your pocket. A good strategy is to invest every month, which means you’ll time it when the market is down, as well as up. This means that it will be a smaller risk that you’ll buy at the wrong times.
Let’s be honest, the world is a risky place. The market can take a dive, different business sectors can take a hit because of various factors, businesses go bankrupt. A lot of people think that investing is risky, and they’re right in some regards. But it doesn’t need to be as risky as they say, these people normally invest in one company and expect it to make them rich. It’s not that simple, it could but it’s a gamble.
A better strategy is to research 10-15 different companies in 5-6 different sectors, then invest in these companies. That means if different businesses and sectors takes a hit, your other sectors and businesses might make a profit. This will make your portfolio more balanced.
You might be wondering why you can’t just loan $10,000 and put it in the stock market, if your stocks go up by 10% then you’ll get more than if you invested $1,000. The answer is that you could, but it’s extremely risky. First off you need to beat your interest in the loan and then you also need to hope that you make a profit from it.
That’s a risky gamble with someone else’s money, but surely you can pay it back when you’ve beaten the market? Well..what if you don’t? If you loan that money and your investment takes a dive, maybe the company goes bankrupt. Then you still have $10,000 you need to pay back.
It’s important to know that a stock isn’t a magic entity that is going to generate money out of thin air, based on a line that goes up and down. It might sound foolish, but it’s easy to forget that a stock is just a share of a company. If that company is going to perform well over time then you’re money is going to grow, it’s that simple.
That’s why I recommend reading the yearly/quarterly financial reports from these companies and see what their plan is. If they’re planning to purchase a lot of inventories in the coming 5 years as an investment, maybe you shouldn’t invest in the short term. That’s one of the things you can learn from one of those reports.
There are several questions to ask yourself before your invest in a business, here are some fundamental questions that I always ask myself before putting money in a stock:
What does the company do?
What is their business model?
What business sector is the company in?
What is the trend – is it rising, balanced, falling?
What is the company’s intrinsic value?
One of the big traps when investing is that you don’t know when to sell and when to buy. A lot of people buy when the stock is going up and then they get scared when the stock is going down in value so they sell. What’s the impact of this? Well, they are losing money. Instead, set up rules for when to sell beforehand. Some people have rules where they sell if the stock has fallen 25%, other people sell when their stock is over 25% of their whole portfolio (because of risk management).
Invest in multiple business sectors and companies, know what the companies make money by, keep informed with how the businesses are going, and know when to sell.