Moneywise24 Personal Finance

Last week I have started writing a series about investing and fundamental analysis. But then it came to my mind, that I had not yet even devoted an article to some of the basics, which I believe would benefits each investor (or upcoming investor). Therefore, I want to take some time now to elaborate my personal golden rules of investing.

#1 - buy low, sell high

Ofcourse! Buying a stock when the price is low and selling when it is high makes sense. But yet, many people buy a stock when it is quite expensive already, or when it is about to reach a top. It is a psychological phenomenon: many people will only buy what has been proven to be a good product in order to avoid risks. The problem with stocks, however, is that those good and popular stocks are quite expensive already.

#2 – Research well and take your time

Investing is not about speculation. If you are a serious investor, or if you would like to become one, you should not take hasty decisions or trying to make a 35% profit until next week. Research the market well. Apply the fundamental and technical analysis if you want to, and know what you are buying; be aware of the potential gains, potential losses, and development over time.

#3 – Don’t put all your eggs in one basket.

Diversification is the key word here. Don’t put all your money on one company, but diversify between different companies, different industries, and different regions. This way, if a company or industry is not performing as expected, the other stocks in your portfolio might absorb some of your losses. Additionally, you may want to think about diversifying the products you buy; invest some money in obligations and perhaps real estate too.

#4 – Accept your losses.

Losing some money now and then is part of the game. Therefore, it is smart to identify a stop-loss limit. This means, that you can set a rule such as “if my stock drops 8% I will sell it”. You can simply set the minimum selling price at your broker, and as soon as your stock reaches this limit, it will be sold automatically. Also, as your stock rises, you may want to increase the stop-loss limit also. Many people hold on to their stocks when they are making losses. Although some companies recover fairly quickly, others might not, and you may end up having a non-performing stock in your portfolio for years.

#5 – Selling is as important as buying

Continuously track the performance of your stocks, and attempt to predict future developments. If you thinks that a stock has reached the peak of its potential, you may want to think about selling in order to convert the stock into cash. Selling is just as important as buying, unless you aim at receiving a steady return in the form of dividends.

#6 – Reinvest dividends

Reinvesting the dividends you receive can make a huge impact on the long run; do not underestimate the power of receiving dividends.

#7 – Go your own way

Try to identify what works best for you, and do not follow the main stream. Once people start investing in certain stocks massively, chances are that the really smart investors have already long sold their positions in search for other high-potential stocks.

#8 – Have a long-term vision

Investing is something you do for your long-term development and growth. Therefore, let go of the idea of making fast and immediate profits, but look at investments as a contribution to your personal long-term growth.