People tend to think of the stock market like a casino. You go in, make your bet, then stand back, cross your fingers, and hope you hit a jackpot.
Well, actually, that’s not quite accurate.
Investing is less like a round of roulette and more like a game of chess. You don’t trust in dumb luck; you follow the rules and make strategic moves that will help you come out on top.
Of course, the trick is…you need to know the rules of investing.
As someone who lost $15,000 on her first investment but has since made much more than that investing, I’ve learned how to invest the hard way. So today, I’m giving you 10 rules of investing so that you can make passive income with confidence.
Investing Rule #1: Don’t invest before you’re ready
Before you start putting money into investments, make sure you’re financially prepared to invest.
Doing things in the right order makes a big difference to your ability to build wealth and make the most of your money. If you try to invest before you’re ready to, you may be forced to sell your investments at a loss.
I recommend following our Wealth-Building Roadmap:
Investing Rule #2: Think of investing as a long-term strategy
Investing isn’t a get-rich-quick scheme. You don’t invest your money and collect your profits the next day.
When it comes to investing, the best strategy is buy and hold.
Ideally, you should let your investments grow for at least 5 years. If you don’t think that you’ll be able to leave the money for 5 years, you should wait to invest.
Investing Rule #3: Don’t invest in what you don’t understand
This is a mistake that I made once, and this is how I lost $15,000.
Financial literacy is crucial to financial success.
You need to do your research and gain the literacy to actually make sure you understand what it is that you're investing in. Do your research to ensure that this is a valuable thing that is going to continue to appreciate in value.
For example, if you don't understand anything about Bitcoin or blockchain technology and you don't know why it's valuable or why it would keep appreciating, it probably doesn't make sense to invest in that type of asset if it's not something you understand.
Investing Rule #4: Aim to double your portfolio every ten years
This rule doesn’t apply to every single person. How much you increase your portfolio will depend on your lifestyle, situation, and goals. But it’s a reasonable and solid goal to aim for.
Investing Rule #5: Approach single stock investing like a casino
Stocks are high-reward investments…but since they’re directly tied to a company’s performance, they’re also high-risk. If the company has a bad quarter — or worse, goes out of business completely — then the stocks will take a hit.
That’s why, if you’re going to invest in single stocks, then think of it like gambling. In other words, don’t invest more in single stocks than you’re willing to lose.
The smarter, safer approach is to invest in mutual funds or ETFs. These are bundles of stocks, so the different stocks balance out the highs and lows of each individual company and provide better stability.
Investing Rule #6: Diversify your investments
So just so I was talking about how I don't really recommend single stock investing, this is because you're putting all of your eggs in one basket.
You want to make sure that if your investments lose money, you don't lose all of your money, and when you invest in just one thing, you're more at risk of that happening.
So, we recommend diversifying your investments This ensures that your financial situation is not completely dependent on any one given company.
Instead, you can ride up and down any fluctuations in the market and experience the appreciation of the growing economy over the long term.
Speaking of investment diversity, here’s a trick for figuring out how much to invest in stocks:
Investing Rule #7: Subtract your age from 100; the resulting number is the percentage of your portfolio you should invest in stocks
Stocks are considered a higher risk investment, which means they have more volatility and they can be high reward, but they also could have less of a reward.
In order to make it most likely that you will have the best returns, you need to give them a lot of time to mature. As you get older and closer to retirement, you have less time for your investments to grow and you have less time for your investments to recover if they do poorly.
So, it's best to start diversifying your portfolio and investing in lower risk investments like bonds in addition to your stocks.
Investing Rule #8: Don’t check your investments too often
Look, remember the best approach is a buy and hold approach. We want to be investing for the long term.
The stock market is a roller coaster. It literally goes up and down all the time. If you check it too often, it messes with your head.
Like I said at the beginning, it's a long-term strategy and historically the stock market has always recovered.
So, make your investments, set them and forget them and leave them alone.
Investing Rule #9: Buy when people are panicking
When the market drops, people start selling. Never ever do this if you can help it. You’re selling at the bottom of the market, so you’re probably losing money.
In fact, counterintuitively, when the market is down is the best time to buy. Historically, the stock market has always recovered and has continued to rise.
Things are on a discount, and if you can afford to wait long enough and you're investing for the long-term, historically, the stock market has always recovered and continued to rise.
Buy your ETFs when they are comparatively cheap and you'll thank yourself when the market recovers.
Investing Rule #10: Minimize fees
When you follow these rules, self-managing your investment portfolio is easy, so you don’t need to pay a financial advisor. In fact, if you want to uplevel your investing game, you can check out our free masterclass, Think Like an Investor, to learn the secrets of successful investors.
But if you do use a financial advisor or robo-advisor, make sure they don’t charge more than .3% in fees.
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