The 15 Golden Rules of Investment You Should Follow

Investing is a crucial aspect of personal finance that can help you build wealth and secure your financial future. However, with so many options, strategies, and constantly changing market conditions, it is easy to feel lost and make impulsive decisions that could prove costly in the long run.

To help you navigate the complex investing world, we have compiled some golden rules you should follow. These rules are not set in stone but are based on sound principles and proven strategies successful investors use.  

If You Can’t Afford to Invest Yet, Don’t

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Prioritize your financial stability before considering investing. Have a solid emergency fund, be debt-free, or manage any debt effectively. If you do not have enough disposable income to invest, waiting until you are in a better financial position is fine. Trying to force investments when you cannot afford them can lead to unnecessary stress and potentially worsen your financial situation.

Set Your Investment Expectations

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Before you begin investing, consider the returns you’re realistically expecting and be clear on your investment goals. Are you investing for long-term growth or short-term gains? Do you want to invest conservatively or take on more risk for potentially higher returns? Setting expectations and goals can guide investment decisions and prevent disappointment.

Understand Your Investment

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Before investing, educate yourself on the investment you are about to make. Understand the risks, potential returns, and how they fit into your investment portfolio. Don’t invest in a product you don’t understand. Blindly following the advice of others or investing in a trendy stock without proper research can lead to financial losses.

Diversify Your Portfolio

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The age-old saying “Don’t put all your eggs in one basket” applies to investing. Diversifying your portfolio among various asset classes, like stocks, bonds, real estate, and commodities, helps mitigate risks. If one sector experiences a downturn, other investments can help balance any potential losses.

Take a Long-Term View

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Successful investing requires patience and a long-term view. Trying to time the market or chasing short-term gains can lead to impulsive decisions that may not align with your investment goals. Instead, focus on the bigger picture and stick to your investment strategy.

Keep on Top of Your Investments

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It’s wise to review your investments’ performance regularly. The decisions that suited you two years ago may no longer be optimal. Whether you consult an independent financial advisor or perform your assessment, it’s prudent to reassess your investment choices periodically.

Think Like an Owner, Not a Trader

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Investing is not the same as trading. Trading involves buying and selling assets in short periods to generate profits quickly. Investing requires a long-term commitment, focusing on companies’ fundamentals rather than market fluctuations. Investors can build wealth over time by thinking like owners and taking a long-term view.

Stick to Your Process

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The best investors develop a consistent and successful process over many market cycles. However,  it can be easy to deviate from your plan when the market gets volatile because you’re temporarily losing money. Don’t do it, even if short-term challenges cause you to doubt yourself. Stick with your plan; it will pay off in the long run.

Buy When Everyone Is Fearful, Sell When Everyone Is Greedy

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One of Warren Buffet’s most famous quotes is, “Be fearful when others are greedy and greedy when others are fearful.” This statement means buying stocks when everyone else is selling them in a bear market and selling them when everyone else buys them during a bull market. It takes discipline to do this, but it can lead to significant gains.

Keep Your Investing Discipline

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Emotions can be a significant detractor from investment success. Feeling fear or excitement during market fluctuations is natural, but letting those emotions drive your investment decisions can cause you to deviate from your strategy and potentially lead to losses. Stay disciplined and stick to your plan, even during turbulent times.

Avoid Timing the Market

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Trying to time the market is not only impossible, but it can also lead to significant losses. Instead of trying to buy low and sell high, investors should focus on their long-term investment goals and stay invested through market ups and downs. The market will inevitably have fluctuations, but staying invested over the long term can help smooth out any short-term volatility.

Stay in the Game, Have an Emergency Fund

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Having an emergency fund is crucial, not just to navigate tough times but also to maintain long-term investments. Keep 5 percent of your assets in cash, as life presents challenges. Such a fund can help you remain invested even during difficult periods, ensuring you stay in the game for the long haul.

Seek Professional Advice When Needed

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Investing can be complex, and it may be wise to seek professional advice if you are unsure about making investment decisions. Financial advisors can provide valuable insights and help create a customized investment plan that aligns with your goals and risk tolerance. However, always do your due diligence and research the advisor before entrusting them with your finances.

Continuously Educate Yourself

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The financial landscape is ever-changing, and staying up-to-date on trends and developments can help you make more informed investment decisions. Read books, attend seminars, or take courses to expand your knowledge and stay ahead of market shifts. Continuous education can also help you refine your investment strategy over time.

Hedge Against Potential Losses

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No investment is entirely risk-free, and it’s essential to have a plan in place to mitigate potential losses. One way to do this is by using hedging strategies, like buying put options or investing in inverse ETFs. These methods can help protect your portfolio from market downturns while allowing long-term growth. Cash, high-yield savings accounts, and bonds are great hedges against risky investments.

DisclaimerCanadian Essence (CE) does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only. This list is solely the author’s opinion based on research and publicly available information. The inclusion of links to third-party content is not an endorsement by CE of such content or services. Use your discretion.

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