For seasoned and successful investors, having the discipline to follow your pre-defined investment rules is your core. This will guide you through the various market conditions of bulls and bears, times of greed and fear, and periods of high risk and great opportunity.
High IQ, great market instincts, extensive investment experience, superb education. They are good, but not nearly good enough.
Having your own cardinal investment rules will allow you to better appreciate what you are doing as an investor. The aim is to reduce mistakes and avoid pitfalls that otherwise wreck apart investment portfolios. By taking prudent risks with potential positive upsides, you stand to boost your long term investment returns and at the same time reduce losses.
21 Cardinal Investment Rules
- Patience is a virtue. When applied to investing, will greatly reduce your mistakes and improve investment returns.
- Know what kind of investor you are. Adopt strategies that best fit your personality and beliefs.
- Understand the different types of investment risk. Avoid or mitigate them as much as possible.
- Implement risk control strategies. Ensure presence of diversification rules and do not deviate from their parameters.
- Invest in the market when the odds are heavily in your favor.
- Invest like an owner. Your outlook as a long term owner is different from a renter. You care more about your assets.
- Only invest in what you understand. Good research leads to good investment decisions. If you don’t understand how and why, don’t make the investment.
- Let coffeeshop talk remain.. coffeeshop talk. Do not invest on hearsay but your own market research.
- Do not listen to financial forecasters and naysayers.
- Never invest with money which you need. You might have to sell your investment at a lower price when you need the money most.
- Concentrate on not losing money first. You tend to make more bad decisions when you are preoccupied with only making money.
- Saving, investing and and gambling are all different. Know why they are different and treat them accordingly.
- Carry out asset allocation. Minimize correlations by investing in assets from different asset categories.
- Focus your portfolio on a few industries with strategic advantages and/or bargain valuations. This will enable you to own the best opportunities.
- Avoid over-diversification. Your portfolio should not look or feel like an index fund with average performance at best.
- Focus on the medium to long term. Spend time in the market.
- Don’t time the market. You cannot pick the bottom nor the top consistently. Make investment decisions based on value. Buy when values are good, sell when high.
- Buy when everyone else are fearful. This is when you will get bargain prices.
- Buy on corrections. Even raging bull markets have corrections which are opportunities to buy at better prices.
- Sell when everyone else are greedy. When the market is moving higher day after day, week after week; sell some. No one ever goes broke taking a profit.
- After all these cardinal rules are taken to heart, realise that there is NEVER a best time to invest. Uncertainty is and has always been a part of investing.