If you buy into all the latest investing apps, they make it look simple. But don’t be fooled; investing gets complicated. And it can become even more so if you are trying to stay ahead of new trends, strategies, financial products, and fluctuating markets. However, using common sense and sticking to a few key financial principles can help you navigate your finances. Unfortunately, many people forget these and make foolish mistakes that cost them money. Even if you are just starting out, here are 10 investing principles everyone should understand.
10 Investing Principles Everyone Should Understand
1. Saving and investing are two different things.
One of the most common misconceptions that I hear is when people assume that their saving and investing strategies are one and the same. However, understanding the difference is one of the most important investing principles.
Investing is an important part of long-term retirement planning. But, it requires you to put money in riskier assets to get higher returns. On the other hand, saving goals require more stable products and should be accessible when you need funds. Since you are allocating the funds towards different goals, they should operate independently of one another.
2. You aren’t Warren Buffett.
If you enjoy discussing investment strategies, you will encounter many eager, young investors who have high hopes of becoming the next Oracle of Omaha. However, you have to be realistic. You are probably not the next Warren Buffett. But, that doesn’t mean that you can’t develop a sound investment strategy.
The average investor will experience moderate success with sound decision-making and long-term gains. While it’s great to have role models and high aspirations, you must make decisions based on your financial situation.
3. You can’t time the market.
Investors have always tried to predict the future and time the markets to maximize their ROI. But, no one has a crystal ball and investing isn’t an exact science.
Truth be told, it’s impossible to know exactly how the markets will react. Therefore, you shouldn’t try to time the markets. There will always be ebbs and flows, so it’s better to take a measured approach to ride out the highs and lows of these fluctuations.
4. Day trading is harder than it looks.
When day trading apps hit the scene, it was big news. In the past, investors relied on brokers to handle their trading. But now, the average investor can access the same markets without a middleman.
Although these apps have made investing more convenient, day trading is much harder than it looks. If you were to ask someone who makes several trades a day, they will probably tell you that they don’t make much money. In fact, many people experience losses from these trades. That’s not to say that you can’t make money day trading. But, it’s naive to ignore how much skill and luck it takes to be successful at it.
5. You probably won’t get rich on meme stocks.
Investing has become a popular topic of conversation on social media. With a quick search, you can find hundreds of sites and videos that discuss new products and available stocks. Some of these groups and forums attract novice investors and create frenzies when the nets start buzzing about the latest meme stocks.
Unfortunately, it’s probably too late to jump on the gravy train by the time it becomes newsworthy. Unless you owned these stocks become they became popular, there is very little chance you will make money from meme stocks. Any financial advisor worth their salt will tell you to avoid popular trends and stick to the fundamental investing principles and strategies.
When it comes to your assets, you never want to be all your proverbial eggs in the same basket. Therefore, diversification is an important way to mitigate risk and protect your portfolio during market declines.
When you are building your portfolio, you want a healthy, well-rounded amount of offerings with different types of assets, including some that are inversely correlated or independent of the stock market. For those who take a more hands-off approach, index funds are a wise investment since they have built-in diversification that will bring you steady returns.
7. Short-term losses and market fluctuations are normal.
If you have been tracking your portfolio day to day during the last year, it has been gut-wrenching. But when I get that feeling in the pit of my stomach, my financial planner always reminds me that market fluctuations are the nature of the game.
You have to accept that there will be periods of significant gains and serious losses. Remember, these fluctuations are normal and market corrections will happen. The worst thing you can do is panic sell. Instead, take a longer view and allow time for the markets to rebound.
8. Expect taxes and fees.
When you are investing and earning dividends, you should expect to pay management fees and taxes on your trades. When it comes to your investments, there are going to be tax implications when you sell stock or take withdrawals. So, you should have a clear understanding of these before you act.
9. Investing shouldn’t be one-size-fits-all.
Everyone has different risk tolerance and long-term goals. That’s why the initial assessment is so important to your strategy. If you haven’t done it already, it will help you determine where you are at in life and what products and assets will get you to your goals. Every situation is unique. Therefore, a one-size-fits-all approach won’t work when it comes to investing.
10. You have to monitor and adjust your strategy regularly.
There are several helpful investing principles. But if you take nothing else from this list, let it be this: change is constant. So, you have to monitor and sometimes adjust your strategy.
Markets and economic conditions never remain stagnant. Since they are always changing, you can’t just set your strategy and walk away. It’s a good habit to check them on a regular basis. Or if you prefer, pay someone to do it for you. As markets and circumstances fluctuate, may need to rebalance, reallocate funds to more profitable investments, or adjust your risk tolerance level. If you aren’t willing to adapt, it could cost you more than you realize.