Investing can often be broken down into a few simple rules that investors can follow to be successful. But success can be a lot about what to do and what not to do. On top of that, our emotions throw a wrench in the whole process. While everyone knows you should “buy low and sell high,” our temperament often leads us to sell low and buy high.
So, it’s important to develop “golden rules” to guide you through difficult times. Anyone can make money when the market goes up. But when the market goes up, successful and progressive investors are the ones who have a long-term plan that works.
Here are 10 gold investment rules to follow to make you a more successful—and hopefully wealthy—investor.
Rule No. 1: Don’t lose money
Let’s start with some timeless advice from the legendary investor Warren Buffett, who said “Rule No. 1 is never to lose money. Rule No. 2 is to never forget Rule No. 1. The advice of the Oracle of Omaha emphasizes the importance of avoiding losses in your portfolio. If the more money you have in your portfolio, the more money you can make.So, losses will lead to future earning power.
Of course, it’s easy to say no to losing money. What Buffett’s rule means is not to be enchanted with the potential benefits of investment, but also to look for the downsides. If you are not getting enough return for the risk you are taking, the investment may not be worth it. Focus on the downside first, advises Buffett.
While stocks are volatile, they are based on the earning power of global businesses. As earnings rise, so will stocks, at least over time. Unlike cryptocurrencies, which typically have no basis—such as earnings or hard assets—to support their value. That is, cryptocurrency is ultimately worthless — not a risk Buffett wants to take.
Rule No. 2: Think like an owner
“Think like an owner,” says Chris Graff, chief investment officer at RMB Capital. “Remember you are investing in a business, not just a stock.”
While many investors treat stocks like gambling, real businesses stand behind these stocks. Stocks are fractional ownership interests in a business, and as the business performs well or poorly over time, the company’s stock tends to follow the direction of its profits.
“Know your motivations when investing,” says Christopher Mizer, CEO of Vivaris Capital in La Jolla, California. “Are you investing or gambling? Investing involves fundamental analysis, valuation, and opinions about future business performance.
“Make sure the management team is strong and aligned with the interests of the shareholders, and that the company is in a strong financial and competitive position,” Graff said.
Rule No. 3: Stick to your process
“The best investors develop a process that is consistent and successful over multiple market cycles,” says Sam Hendel, portfolio manager at Kepos Capital. “Don’t deviate from the tried and true, even if short-term challenges cause you to doubt.”
One of the best strategies for investors: the long-term buy-and-hold approach. You can buy stock funds regularly in your 401(k), for example, and continue to do so for decades. But it can be easy when the market is volatile to deviate from your plan because you lose money. Don’t do that.
Rule No. 4: Buy when everyone else is scared
When the market goes down, investors often sell or simply stop paying attention. But when it’s busy. It’s true: the stock market is a selling market and everyone is afraid to buy. As Buffett once said, “Be afraid when others are greedy, and be greedy when others are afraid.”
The good news if you’re a 401(k) investor is that once you set up your account you don’t need to do anything to continue buying. This structure keeps your emotions out of the game. You will continue to buy stocks when they are cheaper and provide better long-term value.
Investors who continued to buy throughout the 2020 downturn are riding stocks throughout 2021, and the same will apply to future downturns as well.
Rule No. 5: Always discipline your investment
It is important that investors continue to save over time, in rough and good climates, even if they can put away just a little. By continuing to invest regularly, you will get into the habit of living below your means even as you build a nest egg of assets in your portfolio.
A 401(k) is the ideal vehicle for this discipline, as it takes money from your paycheck automatically without you having to decide. It’s also important to choose your investments wisely—here’s how to choose your 401(k) investments.
Rule No. 6: Keep it varied
Keeping a diversified portfolio is important to reduce risk. Having a portfolio of just one or two stocks is not safe, no matter how well they perform for you. So experts advise to spread your investments in a diversified portfolio.
“If I had to pick one strategy to keep in mind when investing, it would be diversification,” says Mindy Yu, former chief investment officer at Betterment. “Diversification can help you weather the ups and downs of the stock market.”
The good news: Diversification can be easily achieved. Investing in the Standard & Poor’s 500 Index fund, which has hundreds of investments in America’s top companies, provides immediate diversification for your portfolio. If you want to diversify even more, you can add bond funds or other options such as real estate funds that can diversify in different economic climates.
Rule No. 7: Don’t time the market
Experts routinely advise clients not to try to time the market, that is, try to buy or sell at the right time, as popularized on TV and in movies. However, he often cites the saying “Time in the market is more important than timing the market.” The idea here is that you should stay invested for strong returns and avoid jumping in and out of the market.
And this is what Veronica Willis, an investment strategy analyst at the Wells Fargo Investment Institute, recommends: “The best and worst days are usually close together and occur when the market is most volatile, during a bear market or an economic recession. Investors need expert precision to be in the market for a day, exit the market the next day and return the next day.
Experts usually recommend buying regularly to take advantage of dollar cost averaging.
Rule No. 8: Know everything you invest in
“Don’t invest in products you don’t understand and make sure the risks are clearly disclosed before investing,” said Chris Rawley, founder and CEO of Harvest Returns, a fintech marketplace for investing in agriculture.
Whatever you invest in, you need to know how it works. When you buy a stock, you need to know why it makes sense and when the stock will be profitable. If you’re buying funds, you’ll want to know their track record and fees, among other things. If you are buying an annuity, it is important to understand how the annuity works and what your rights are.
Rule No. 9: Review your investment plan regularly
While it may be a good idea to set up a solid investment plan and just do the math, it’s a good idea to review your plan regularly to see if it still fits your needs. You can do this when checking your account for tax purposes.
“Remember, your first financial plan will never be your last,” says Kevin Driscoll, vice president of investment services at Navy Federal Financial Group in the Pensacola area. “You can look at your plan and should review it at least annually—especially when you reach milestones like starting a family, moving, or changing jobs.”
Rule No. 10: Stay in the game, have an emergency fund
It is very important that you have an emergency fund, not only to tide you over during difficult times, but also to allow you to invest in the long term.
“Keep 5% of your assets in cash, because challenges happen in life,” says Craig Kirsner, president of retirement planning services at Kirsner Wealth Management in Pompano Beach, Florida. He added: “It’s really worth having at least six months’ worth of expenses in your savings account.”
If you need to sell some of your investments in a tough spot, it’s probably during a downturn. An emergency fund can help you stay in the investment game longer. Money that you need in the short term (less than three years) should stay in cash, ideally in a high-yield online savings account or perhaps in a CD. Shop the store to get the best deals.
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Good investing is about doing the right thing and avoiding the wrong thing. And among all that, it is important to manage your temperament so that you can motivate yourself to do the right thing even when it may be dangerous or unsafe.