Learn These 13 Principles of Investing for a Great Investment
If you have an idea or know a thing or two about investing than you’re probably aware of some of the following principles. But, if you have no clue, no worries. We’ve got your back.
We’ll share with you, 13 of the most important principles that will guide you in making investment decisions, which will keep your investing on point. These investing principals are not in a particular order, but I believe the last few are the most important.
The 13 investing principles are:
- Continuously learn
- Don’t take it personally
- Control your destiny
- watch out for volatility
- Mitigate risk
- Use compounding interest to your advantage
- Seven have a long term mindset
- Asset allocation is key
- Have a margin of safety
- Investment costs matter
- Regression to mean is the thing
- Diversification is Paramount
- Risk and Return, go Hand in Hand
Now let’s begin:
13. Risk in Return, Go Hand in Hand.
The ultimate principle of all investments is that risk in return is basically different sides of the same coin.
You see, the higher the risk, the higher the rate of return, for example, an investment that promises you a return of over 20% of your initial investment almost likely have a higher risk compared to an investment that will give you a 10% return.
So keep in mind that investment that’s substantially increased rapidly are very high risk.
For example, let’s say you invested in a stock that grew by 50% within a year, which is a very good return on your investment. Now understand that this is probably a very volatile stock and as quick as it grew, it can come crashing down just as fast.
We will talk more about this later in this article.
Risk and return, are like Fire and Oxygen. The safe investment as we all know offers the lowest return for your money, and most investors usually flock to these kinds of investments because nobody wants to lose their hard-earned money.
However, for a risk-taker hungry for huge returns. These safe investments aren’t is appealing. They prefer riskier investments with potentially huge upsides, such as startups and IPOs.
With this in mind, it’s up to you to choose how to play your cards.
12. Diversification is Paramount
One of the best ways to secure your money when investing and also guarantee a good return is to diversify your investments.
We all know that stocks are like rollercoasters, and they constantly fluctuate depending on market conditions on what’s going on in the country.
This is why gurus in the investing industry usually advise people to diversify their investment portfolio. This means you can invest in different asset classes such as bonds, commodities stocks in different sectors such as tack, energy, healthcare, and so on. If you hate losing money, diversification is your best bet to safeguard your investment while at the same time growing your money.
You see by diversifying your portfolio, you’re ensuring your investments against constant market volatility that can easily wipe out your money.
Let’s say if two out of the five stocks in your investment portfolio or performing poorly then the other three stocks should cover the losses of your two losing investments. This principle ensures that you lower the risks of your entire investment.
11. Regression to Mean
Regression to mean is a thing. This may sound a little confusing to some of you, but it’s really not that complicated. It simply means that all the things in our world from average return on investment, ROI to average yearly rainfall, usually return to its historical averages.
Let’s say a stock has been performing extremely well for the past three years, constantly giving investors an ROI of 28% or more annually, while the average return rate for similar stocks is 9%.
While every investor dreams of a stock that will guarantee them year on year, a return rate of 28% or more just like in our example, this almost never happens.
Most stocks just like the one we mentioned before, will usually return to its industry average and historical yearly growth.
So although the stock did grow 28% or more each year for three years, it will most likely be returned to its industry average of 9%. When most investors are analyzing stocks. They look at the most recent returns of an asset class rather than the past trends.
By doing this, they’re trying to foresee and predict its future performance because their regression to mean concept will take place. Stocks that constantly over performed for a couple of years will probably underperform within the next coming years.
It’s almost impossible for an investment that has yielded modest returns historically. Say for the past 15 years, to all of a sudden become a serious money maker.
10. Investment Cost Matter
All costs matter, even that 1% fee could often go unnoticed. Many people don’t pay attention to the small fees. They’re charged as they should see a small 1% fee may not mean much, but when you do the math, you’ll be completely surprised just how much you could potentially lose.
Let’s say you’re shopping around for a fund manager and you find two great choices.
One charges you 1.5% annual management fees and the other charges 0.5%. It doesn’t seem like a big difference does it? Right now it may not look like much, but over time that small fee could result in you potentially losing thousands of dollars in the years to come.
It’s believed that the fund companies that charge more in fees have more money for research, and the perception is they do a better job.
However, research indicates otherwise. Investors who minimize all their costs do better overall.
9. Have a Margin of Safety
Have a margin of safety price and value for your money will always matter when it comes to investing.
One of the best principles of the art is to have a margin of safety by this I mean, purchase assets for less than their real value, basically by them at a cheap price.
Sometimes assets will be priced lower than their intrinsic values, especially during a recession period. Acquiring an asset at a low price or at a below-market price is a great deal for an investor because the return on investment is almost guaranteed.
Plus, if for some reason he needs to get rid of the asset quickly in the margin of safety will protect the investor. We all know circumstances can easily change in the financial markets.
Financial markets are sensitive to multiple factors. See what happened with Coronavirus. Within no time markets are plummeting all over the world.
8. Asset Allocation
Asset allocation is the key. The way an investor divides their portfolio among different asset categories is key to ensuring returns on their investments.
This is where many investors fail as they put very little thought into their asset allocation strategies.
By investing solely in overvalued assets, you are bound to experience lower long term returns. The keys to always evaluate all categories. Underweight the expensive categories and overweight those that are bargain-priced.
7. Long term mindset
Sure, you could make a couple of bucks through speculative moves in the financial markets. But most of the time, you’ll burn a lot of money trying to chase the next big way. The true essence and beauty of trading is buying an asset at a favorable price and waiting for it to appreciate in value. This may take a while, though,
As Warren Buffet says long term investing is one of the most important investing principles. As short term trading will only lead to lower returns or losses in the long run. Don’t let your greed or fear take over your decision-making process and let time do its thing.
6. Power of Compounding
If you’re looking for exponential growth, then you better take some time to understand compounding.
Take the time to understand how it works and how you can use it to double up your returns. One of the most exciting aspects of compounding is the multiplying effect it has on your money over time.
Instead of constantly withdrawing dividends, leave the money there, and watch just how much more you’ll be able to make. As much as compounding may be great. It can also be detrimental.
Reverse compound and can be devastating.
For example, a 10% loss may only require an 11% gain to return to normalcy. But a 50% loss may require a 100% game to get back to break-even. Yikes.
5. Risk Management
Nothing worthwhile in life comes without its fair share of risks and investing is no exception. To minimize risk, investors employ risk management strategies.
Volatilities in someone’s portfolio is one of the leading killers. It can wipe away your money in a flash. It’s a serious problem, one that investors are constantly trying to maneuver around, especially in bear markets.
For those who don’t know bear markets of the markets where share prices are falling, which encourages selling.
So by managing the risk, you will ensure you don’t lose your money.
You need to run away from portfolio volatility but embrace market volatility with open arms.
It is easy to control portfolio volatility but impossible to control that of the financial markets. However, with market volatility comes great opportunities. Be ready to take advantage of them at the right time. Be cognizant of the overvalued assets and also be flexible enough to move your money once the conditions are not favorable.
3. Control Your Destiny
You should be in charge of your money because no one will care about your finances as much as you do.
Conflicts of interest, fraud, and absurd fees make self investing a very attractive option. Luckily today, technology and the Internet has helped in bringing down fees and all other transaction costs.
It also provides all the needed information to make the right investment choices. There has never been a better time in history than now, where you could be a self-directed investor with very minimal effort. Instead of focusing on getting a fund manager or a financial expert, see what you can do by yourself.
You will be surprised at how much you can save in fees in transaction costs.
2. Don’t take it Personally
Now, just like everything in life, you’ll lose and win. The thing with investing is you can either end up making minimal profits, make a ton of money, or lose it all.
The markets determine the return rates, and they could either favor you or not favor you. Ensure you don’t take any failure to heart and be strong-willed to continuously invest your money and never give up.
1.Continuously Learn and Research
There’s a lot of information on the Internet. Use this info to learn new trends, identify new opportunities and channels of investing your money.
Most of the resources is are free, and some have a small fee. Continuously watch business news so you can understand what is happening, and you will soon become an expert investor-owned by your own accord.
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