When it comes to investing, there is a lot of information out there. How exactly do you become a successful investor and what information should you follow? After reading through a lot of the advice, I came up with 4 rules that seemed to be prevalent with investing experts.
And when I say investing experts, these are people who have been successful investing money over the long term. Think Warren Buffett.
In this post, I am sharing with you these 4 timeless investing rules that you should always make certain you are following. They will always apply, no matter what is happening in the market and they will always serve you well.
Let’s get started.
4 Simple Investing Rules To Grow Your Wealth
#1. Keep Your Emotions In Check
Hands down the most important rule to follow is to keep your emotions in check. The more you can do this, the less likely you will make a decision based purely on emotion. When you make decisions based purely on emotion, the majority of the time it ends up bad.
But how do you keep your emotions in check when investing? After all, we are talking money here and it can be very emotional to see your wealth drop or rise.
There are a few ways to keep your emotions in check. The first step is to create an investment plan, regardless if you are a beginning investor or a seasoned investor. Your plan will outline why you are investing and what you are investing in. When the market drops or rises, instead of going on emotion, you can look back to your plan to help you make a decision.
Another way to manage your emotions is to make sure you have the correct asset allocation for your risk type. When you are invested in a way that meets your needs, you should be able to sleep at night. Your portfolio, while it will rise and fall, should not be so volatile that you cannot handle staying invested.
#2. You Can’t Time The Market
Another investing rule to follow is to know that you cannot time the market. This means that you will never be able to consistently buy at the lowest point or sell at the highest point. In many cases, when the market is dropping, investors hold on too long and sell out at the bottom.
On the other side of the coin, when the market is rising, most investors get greedy and don’t sell at the peak. They instead hold on, hoping for more growth. But the stocks tank and they lose their gains.
So if you can’t time the market, what are you left to do? If you have a long term view of the market, it really doesn’t matter when you invest. The key is to just start investing.
If you are invested already, set a limit for when to sell. If the price of the investment drops by 10%, that is your sign to sell. You can do the same for gains as well. If the price of the investment rises by 15%, that is your sign to sell.
#3. The Market Is A Cycle
The next rule to follow is to understand that the stock market is a cycle. It rises for a bit and then falls. Then it will rise again only to fall again. Your first question is probably about wanting to know when this happens. The answer is to refer back to the point above.
You don’t know. No one does. All of the headlines you read about the market cratering or rising to 50,000 are just guesses. Most times these people predicting the stock market are trying to sell a book and this is how they get their name in the media.
For reference, you can look at this guide for how long a typical cycle lasts. But again, it varies and you will never know for sure.
#4. Trading Costs You Money
Finally, you have to know that trading costs you money. Every time you buy or sell, you are paying a fee and someone else is making money. The more you trade, the more you spend and the more money someone else makes.
Who is this someone else? Wall Street. They hype up the market and try to scare you when it is falling. The better job they can do of this, the more likely it is you will react emotionally and buy or sell. And then they make money.
What do you do about this? Again, have a long term plan. When you have the itch to buy or sell, refer back to your plan. This will help you to make the best decisions for you and your situation.
From there, just knowing that Wall Street wants you to trade is important. You can assess this when you hear the latest news. Ask yourself if this is relevant or just hype to get me to sell or buy?
Most investors are best served buying and holding mutual funds for the long term. Simply find high quality, low cost funds and keeping adding money into these funds for the long term.
If you can follow these 4 investing rules, you can have success in the stock market. They are simple in concept and some are easy to follow. But others, like keeping your emotions in check will take some work on your part.
But if you can follow all of these rules, you will see your wealth grow through investing in the stock market.
Author Bio: Jon blogs at Penny Thots, a personal finance site that helps readers improve their finances one day at a time.