Investing is crucial in attaining financial independence and can seem a bit complex for the layman. More often than not, the terms alone have you reaching for a glossary and scare you into overthinking and reconsidering your decision to invest.
Attempting to understand the unpredictable market cycle, and knowing how to manage risk is a daunting task, but investing is much easier than you think. Mastering the art of investing will require patience and practice, but with these rules as a guide, chances are you’ll get the odds on your side.
Rule #1 – Keep it simple.
You should know and understand how your investment is making you money. The more complex and opaque an investment strategy is, the greater the chance wrong investment decisions and other mistakes will be made. It is always better to keep it simple and invest only in what you understand. Investing to get a healthy return requires you to also understand the possibility of loss.
Rule #2 – Diversify your portfolio.
One of the most important rules when investing is diversifying your portfolio. The value of investments will fluctuate, which will cause fund prices to fall as well as rise. Your investment may increase or decrease as a result of currency fluctuations. The wider your portfolio spread, the less dependent you’ll be on the unpredictable value development of individual securities. Diversification is a powerful concept that helps minimize risk while promising returns.
Rule #3 – Keep costs low.
Various studies show that costs are the most important indicator of the future return of an investment fund. Therefore, costs should be a leading factor in choosing the right investment mix. Inflation, taxation, and charges are factors that can affect the real rate of return on your investment. Many of these costs might not be made transparent, it’s up to you as an investor to do your due diligence to find out charges and how they affect your investment.
Rule #4 – Spread risk.
The distribution of your assets over high-risk investments and risk-averse investments largely determines the return of your investment portfolio. Opting to invest in various markets and securities with varying risk levels, can help to ensure your investments won’t all concurrently rise or fall in value. It is very important as an investor, to choose an investment mix with a level of risk that best agrees with your financial goals.
Rule #5 – Invest now for the long term
Deciding to invest early in assets that produce a high rate of return, privies you to the power of compound interest. Over time, there’s a huge increase in the potential impact of compound interest on your investment’s original value. Long term investments are more likely to help you achieve your financial goals than short term investments that promise a quick profit. The earlier and longer you invest the harder your money will work for you.