Savvy investors can make their money work for them even while they sleep, but inexperience with the markets can see your hard earned money disappear in the blink of an eye. Here are 4 golden rules of investing to safely and effectively invest in financial markets:
1. Know your goals:
One of the biggest mistakes you can make is to go get into investing without having a plan in place. Having a goal in mind and analyzing your threshold of risk is the foundation on which you should build your portfolio. Financial markets are not a get-rich-quick scheme. You should outline a target return, asset class and investment period before you take the plunge. The markets can be volatile. Not everyone has an appetite for risk. Carefully asking yourself if you are prepared to assume a higher risk in anticipation of higher returns is one of the 4 golden rules of investing.
2. Do your research:
Fund managers can often talk in confusing financial mumbo-jumbo. Before you commit your money to anything, do some independent research. The Internet has made information available at the click of a mouse. Understand how the markets work and the importance of diversification. Before you invest, you should be able to clearly explain the objectives and risks of the fund or stock in a few sentences to a lay person. Knowing the risks you are assuming and never investing in something you don’t understand is another one of the 4 golden rules of investing.
3. Swim against the tide:
The collapse of the giant investment firm Lehman Brothers in 2008 showed that market conditions and negative news stories can have staggering effects. Going against the herd can often pay rich dividends to investors. Following the hype can prove to be dangerous. One of the four golden rules of investing is to ignore what everyone is interested in and buy a carefully valued, but ignored stock.
4. Understand stock valuation:
Not everything is worth the asking price. Just like you wouldn’t pay $100 for a plastic cup, don’t overpay for a stock based on assumed returns or prospective future growth or simply hype. Judge and value the stock you’re investing in based on fundamentals like the merits of the company rather than economic conditions or momentum. Waiting for the right opportunity to buy a good stock at a reasonable price is another one of the 4 golden rules of investing.
It is important for investors to adopt a disciplined approach to managing their portfolio. The markets fluctuate – that is their nature. Patience is a virtue when it comes to investing. With realistic expectations and some careful decisions, the financial markets will reward you with much, much more than your investment.