You don’t have to read a bunch of books or articles to become an investor. Truly. Honestly. Really.
BUT you do have to understand a few basic principles, which we’ll be covering in this article. BUT if you need to really kick things off and get the jargon down, can we recommend you start off with our Basics of Investing article? Check that out first then circle back here to go through the four rules.
You already know what a stock is and how you buy one? Great, you’re really in the right place then, so now let’s see how to develop a smart, simple, investing strategy.
What are the rules?
Rule One: You don’t have to pick stocks
What exactly is a ? Stocks represent a partial ownership in a company. When you purchase shares in companies like Apple, Tesla and Google, you buy a small piece of that company
Now, rather than investing in a single company, or stock, you can also opt for investing in the market instead. Investing in the stock market is a safer decision than choosing a handful of companies to rely on for your retirement funds. Why? Because the stock market has a pretty good track record of rising over time and outperforming the market is an incredibly hard thing to do.
An overwhelming majority of investment managers in the industry (aka the financial insiders) who are paid to do this, fail to outperform the market every year. For this reason, it’s better to buy the entire market as a whole rather than select a few stocks that you think might “go to the moon.”
Rule Two: Diversify, Diversify, Diversify
Diversification means investing in a broad basket of assets (many stocks vs a handful) because doing so narrows the range of outcomes, reducing risk without reducing expected returns.
Enter the index fund or ETF, which stands for Exchange Traded Fund. When you buy an index fund, you are invested in all of the stocks that make up an index such as the or the AKA the top stocks in the market. The index fund essentially tracks the overall performance of the market and your money is diversified across different sectors such as technology, energy, finance and much more!
Diversifying your portfolio means you aren’t taking a bet on one particular company or even industry, so if one of the stocks does very poorly, it doesn't have as much of an effect on your overall portfolio compared to if you were just holding a few stocks and one of them bombs.
Rule Three: Keep your costs low
As we all know, fees and expenses matter and can add up quickly. Managed investments usually include management fees, which are costs financial providers charge to invest your money. It’s important to consider lower management fees so you don’t lose out on the profits your money is making for you by paying someone else.
Rule Four: Tune out the noise
Everyday people want to tell you their thoughts - when to buy, when to sell, what to put your money into, which company is going to tank. This chatter can lead to emotional decisions and unlike you or I, money doesn’t have emotions.
The best thing to do is to stay on track with your financial goals and tune out the talking heads on television and social media.
Markets work in cycles, there are lows and highs (or bears and bulls). By panicking and withdrawing money early, you are reducing your potential gains, unless you desperately need that money in the short-term, try to leave it invested and it will bounce back when the market does!