As a financial adviser who has helped hundreds of clients get to grips with their finances, I understand just how confusing and daunting the world of money and finance can be. Unfortunately, basic financial knowledge is rarely part of the educational curriculum, and many parents lack the knowledge to pass on to their children. Hence, a considerable number of us go through life without ever understanding why and how to invest.
I see it as part of my job to change that. I’m not talking about creating stock market billionaires but rather demystifying the investment process to help ordinary people to manage their finances and ensure that they build and grow their wealth to attain financial security throughout their working lives and through to retirement.
With that in mind, I’ve put together the following ten golden rules when investing, drawing on quotes from some of the world’s most successful investors:
10 Basic Rules of Investing
Think long term
‘Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.’ Warren Buffett
If you are trying to speculate or gamble in the hope of making a quick buck, you are most definitely doing one of the wrong ways to build wealth. Instead, ignore the day-to-day media speculation on the hottest stocks at any given time and keep focused on the long term. For most ordinary investors, buying and investing in a relatively stable portfolio over a long term horizon, with carefully considered periodic readjustment, is the way to go.
Think like a businessperson
‘I think you have to learn that there’s a company behind every stock and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well, or small companies grow to large companies.’ Peter Lynch
It is surprisingly easy to forget that you are acquiring a share in a functioning business when investing in stocks. Keeping that in mind might give you some perspective. A business’s share price will usually mirror its success trajectory, so you should look to invest in companies with a solid track record or those with substantial potential based on the fundamentals.
Don’t follow the herd
‘The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.’ John Templeton
The stock market is a funny thing. For almost any product in the world, from cars to cameras to cheese – lower prices are perceived to be a good thing and generally result in increased sales, hence the success of initiatives such as Black Friday. But with stocks, the opposite occurs: falling prices make people scared to buy. As Templeton points out in this quote, the best bargains are to be had when the markets are down. So never be afraid to go against the herd when investing.
Formulate a strategy and stick to it
‘Investment is most successful when it is most businesslike.’ Ben Graham
The great thing about having an investment strategy is that it keeps the emotion out of investing. If you see the value of your portfolio dropping – as many of us did earlier this year – it helps reassure yourself that all you need to do is stick to your strategy. For most of us, a buy and hold strategy will produce the growth we need over the long term. In addition, this strategy accounts for the fact that markets are cyclical, and there will inevitably be periods of volatility with troughs and peaks.
Don’t try to time the market
“The desire to perform all the time is usually a barrier to performing over time.” – Robert Olstein
The portrayal of stock markets on TV and in films promotes the idea that shares should be bought and sold at the right time. Playing financial hokey-cokey with your money is a terrible idea. Historically, market highs and market lows tend to come quite close together, so it is almost impossible to profit from one and avoid the other. Again, usually, the best policy is to stay invested and seek strong returns over the long term.
‘Diversify. In stocks and bonds, as in much else, there is safety in numbers.’ John Templeton
Investment inevitably involves risk, but you can manage the level of risk you face. One way to do this is by maintaining a diversified portfolio of investments in different asset classes, industries and geographical regions. This will help you weather the stock market’s peaks and troughs. Many products on the market make diversification easy to achieve – a financial adviser can help you select the best ones for you.
Invest with discipline
‘We don’t have to be smarter than the rest; we have to be more disciplined than the rest.’ Warren Buffett
Regular, disciplined saving through good and bad times is what will build you a healthy nest egg over the long term. First, prioritise saving over all other non-essential spendings each month and, with the help of compound interest, even relatively small investments can deliver a good return given enough time. Then, automate the process by funnelling a predetermined percentage of your earnings into a savings or investment vehicle when you get your money, so you aren’t tempted to spend the money. This is the easiest way to create a habit that is sustainable and automatic.
Never invest in a product you don’t understand
‘An investment in knowledge pays the best interest.’ Benjamin Franklin
One of the golden rules of investment that many investors follow is never to invest your money in a product you do not know well. Investing your wealth in a product without knowing the associated risks and potential returns could lead you to find yourself in a bit of a problem.
Finance decisions, especially when making investments, should take time. As an investor, it is your responsibility to educate yourself, do your homework, and research before investing in understanding any risk you are taking. This applies to all kinds of financial products, from shares and funds to life and health insurance and annuities.
But remember, help is available. If you find the financial landscape bewildering, seek out a professional financial planner that you trust. You can also approach an investment expert who will take the time to understand your situation, recommend suitable products, explain those recommendations in detail and give you helpful advice on investments. A good adviser will be happy to do so and will never pressure you into making decisions you are not 100% comfortable making.
Review your investments plan regularly
‘No wise pilot, no matter how great his talent and experience, fails to use his checklist.’ Charlie Munger
I’m not an advocate of continuous portfolio tinkering for the sake of it, but there are times when it is necessary to run through your financial checklist and see if your financial plan needs adjusting. Often the need for change coincides with life’s significant milestones such as getting married, starting a family, getting divorced, moving house or changing jobs. Whenever any of these events occur, you should review your financial plan to check it is still fit for purpose. Even when no significant life changes have occurred, I recommend a review at least annually.
Be prepared for an emergency
‘A crisis becomes an inconvenience when you have an emergency fund.’ Dave Ramsey
Before you even start investing in a portfolio, you should build up a bank of cash as an emergency fund. Six months of expenses tucked away in a savings account is what I advise my clients to put by. This money is for those tough times when unexpected expenditure presents itself or if your income takes a hit, as it has for many this year. It is not for that battery-recharging holiday you feel you absolutely must have!
An emergency fund gives you an excellent financial cushion to tide you over tricky times. It means that you won’t be forced to sell investments to get you through, mainly if those tough times are due to, say, a global pandemic and everyone else is selling, causing prices to tumble.
Investment Strategies to Remember
The term “asset allocation” refers to the act of starting with the big picture and not the details when deciding which investments to buy. This means that if you start building your portfolio by finding the right mix of asset classes, you are more likely to reduce investment risk.
One of the most common types of asset allocation funds is a balanced asset mix. This implies a proportional allocation of equities and fixed income. For example, an investor would deploy a 60/40 mix in many investments, which is 60% stocks and 40% bonds.
A bear market refers to a prolonged drop in investment prices. Generally, this term is used when prices in stock markets fall by 20% or more from a recent high.
During a prolonged drop in prices, an investor would usually sell their shares quickly. But, unfortunately, this type of strategy would not help push prices up. Instead, it would only force prices to dip even lower.
Some investors, however, help in conducting “relief rallies,” which would give other investors the confidence to invest in stocks and start buying. This would officially end the drop.
I hope this guide on the golden rules of investing has given you some basic guidelines regarding saving and investing. If you have any further questions or feel like you could do with a hand to navigate the financial maze, I’d be delighted to help. In addition, I would be happy to have a free, no-obligation chat with you to explain how I can help secure your financial future. Please email me at email@example.com to book a slot.
Chartered Financial Planner
It is my fundamental belief that financial planning makes life better. I enjoy helping my clients work towards their financial goals to give them freedom and choice.