5 Golden rules of investing to become a successful investor
There is no exact recipe for investment to work but there are definitely some guidelines which any investor can follow. Here are our top 5 rules for investing:
- 99% of investing is research
Most people think that investing is a get rich quick scheme. They have the misconception that you have to simply choose a stock and leave it running to reap huge profits. What they fail to realize is that most of the hard work is in the research. If your research process is thorough and detailed, your investment choices will have a high probability of returns over time.
- Stay diversified
Putting all your eggs in one bucket could be risky and not a wise choice.
As we had seen in the last 2008 recession with the fall of Leyhman Brothers,investing all your money in banks is not a great idea. It will be
good to have a portfolio which is diversified across different assets like
stocks, commodities, indices, etc. Ensure that you work out your %
allocation into each of those assets too.
- Consistency is key
Once you have worked out your investment strategy, ensure that it has an
edge to help it continue working for steady returns. When we say it works,it does not mean every single investment choice you make will give you a return.
It is the cumulative return from your total portfolio we are referring to.
Thus, to make positive returns with an investment strategy that has an edge, the law of numbers is key. It is just like in a coin flip. For the 50/50 probability to work,you must make a considerable number of flips. You cannot expect it after two coin flips. Most importantly, alongside with the frequency, you must consistently execute your strategy with your parameters. The consistency factor is what helps achieve extraordinary results.
- Minimize your losses and know your exits
Before you put your money into the investment, you must always know how much you are willing to invest and where you want to get out of the market.
As it is, making money is hard work and you do not want to lose it easily back to the market. Thus, calculate your risk and how much you are going to lose before you get into an investment. This was one of the key talents of one of the world’s top traders and investors: George Soros. Your projected exits should give you an expected return of more than your losses and you should continuously monitor your actual returns vs projected returns. As the saying goes,20% of your investments will make up 80% of your profits.
- Review and monitor your performance
It is important to review your investment performance on a regular basis.You can track it on a spreadsheet and see how your profit and balance sheet is looking like across your portfolio. Assess if your current performance is in line with your projected strategy returns. If not, ask yourself if the strategy is starting to degrade and is there room for strategy optimization. Remember that making money from investments is a continual process and not a sprint.