It can be tempting to let one's guard down when times are good. This holds truest in times of robust economic growth. During the bull market that ended in March, equities grew consistently, businesses had easy access to funding, and many occupations provided stable incomes. Many investors made poor choices with their finances because they expected positive profits to continue indefinitely.
In addition to assisting investors in staying on pace to meet their financial goals, these investment realities also serve to keep them out of hot water by helping them avoid making costly mistakes when economic conditions are favorable. There has never been a better time to review these guidelines than right now when so many investors are looking for direction in the face of uncertainty.
Top 10 Golden Rules For Investors
1. Excess Brings Opposite
When markets overreach, we might expect overcorrection, much like a swerving car driven by a young, inexperienced driver. Overcorrections can be much larger than normal corrections, which are defined as declines of more than ten percent from an asset's previous high. Investors have a lot of wonderful possibilities to make purchases during a market downturn. However, they frequently overcorrect in either direction, leading to trade at absurdly high prices. Investors who are in the know will be suspicious of this and will have the knowledge and forbearance to act cautiously to protect their wealth.
2. Bad Debts
Numerous experts will attest that borrowing money is not without its drawbacks. We have to agree with them. Leverage can be very useful in the appropriate situation. However, those who are not indebted to anyone are typically in the best financial situation. If their debt levels aren't constantly monitored, even the savviest investors and institutions might get into problems. Debt-free people have one of the strongest financial footing possible.
3. Money Rules
Having three to six months' worth of living expenses in cash on hand is the cornerstone of every sound financial plan. The people who have the most cash on hand may fare best as economists and market analysts speculate on the impact of the global coronavirus pandemic on the economy. Their savings should get them through financially even if they lose their job or see a big reduction in income. If you're an investor worried about your future income, you should keep putting money aside in case the economy takes longer to recover than projected.
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4. Understand Your Time Horizon
The amount of risk that can be wisely taken within a portfolio is determined by the investor's time horizon. The market volatility is put into perspective. The current bear market shouldn't frighten long-term investors. In fact, you ought to be thrilled. It's a great chance to stock up on stocks at a significant discount compared to where they traded a few months ago.
Short-term investors who have prepared themselves well should also not be frightened by the current bear market. You should have kept a large portion of your investment portfolio in cash or high-quality bonds. Since your investments aren't losing value, you shouldn't feel any effects from the current climate. Investment without knowing when the money will be needed is unwise.
5. Investing's Only Free Lunch is Diversification
Investors have a propensity to chase after and crowd into the "it" investment of the moment. While this is wonderful while things are going well, it's important to remember that businesses, industries, and even entire nations experience cycles. Having too much of your eggs in one basket can be disastrous if the economy ever takes a turn for the worse. Past instances include the dot-com bubble of the late the nineties, the housing bubble of the late twenties, and the Great Recession and its effect on the financial sector and emerging markets.
Having a diversification policy across numerous asset classes is the greatest way to safeguard a portfolio against the dangers of over-concentration in a single market area. Some of your investments may underperform if you take this approach, but your portfolio should also likely contain several that have performed rather well. Taking things slowly and steadily is a prudent strategy for surviving future market bubbles.
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6. Everyone Needs Conservative Bonds
High-quality fixed income is often overlooked by investors when the market is doing well. So why put your money into anything besides rising IT stocks? Bonds play a key role in the portfolios of all investors. They offer the psychological benefit of reducing volatility during heightened market uncertainty. They provide a safety net, allowing investors to get their hands on funds even if the value of other investments falls during a market downturn. Finally, rebalancing possibilities exist when stock prices decrease, and the highest-rated bonds increase in value. It's unwise to leave bonds out of your investment mix.
7. Risk Increases With Big Profits
Investors are constantly on the lookout for the holy grail of guaranteed high returns. In prosperous times, some investors may even begin to believe they have discovered the fountain of youth as their wealth grows. When the economy starts to falter, however, people quickly come to terms with the fact that large predicted returns may also include a significant degree of risk.
Leverage, lack of liquidity, and bad credit are just a few examples of the shapes that risk can take. Simply put, you need to be willing to accept substantial risk in order to get significant potential rewards. Investors need to approach every opportunity with a clear head.
8. Boring Work May be Exciting Sometimes
Exciting ideas are often misunderstood by investors as being strong investment opportunities. New trends, special offers, or an investment approach that claims to outperform the S&P 500 are all potential sources of excitement. More often than not, the basics of these "opportunities" aren't even being discussed.
If you don't want to get suckered into a scenario like that, it's best to stick to safe, uninteresting investments. This could include large-cap equities, index funds, or investment-grade bonds. The trade-off for missing the next big initial public offering (IPO) is avoiding being duped by a Ponzi scheme. It appears that the cost is acceptable.
[ Also Check out Investment Tips For Beginners ]
9. Get to Know Your Risk Tolerance
Before you start investing, find out what your risk tolerance is. Stocks are devised in multiple options, such as large capital stocks, value stocks, small-cap stocks, and aggressive growth stocks. They all come with different risk levels. So, once you have your risk tolerance in place, you can set investment goals based on stocks that complement the goals.
10. If You Win, Quit
If you have amassed a large fortune from your stock market investments, you may find yourself unable to resist the market's allure. Realize that the fundamental goal of investing is to help you reach your financial objectives.
When an investor hits a certain threshold, there is no use in continuing to +risk further capital. Of course, if there are long-term, intergenerational goals, the money should be invested in a way that takes those into account. However, an investor's lifestyle funds could be transferred out of equities if they so choose. Those investors are in the enviable position of not having to worry about the next bear market.
Conclusion
There was never any pretence made that investing was simple. There's a great deal at stake, and it's all very overwhelming. It's easy to get caught up in the ups and downs of market news, emotions, and the free-for-all of the market, whether you're a newbie trader or someone who has been watching the markets for a long time. However, if you stick to Bob Ferrell's tried and true strategies, you have a fighting chance of succeeding.
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Vishnu
Founder & Managing Director of Investor Diary
I, Vishnu Deekonda, am dedicated to providing the proper financial education to every individual interested in becoming financially independent through intelligent investments.
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