These Are the 7 Golden Rules of Investing
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Investing can be a great way to grow your wealth, as long as you do your research and remain focused on your goals. If you want to maximise your success as an investor, there are some key rules to follow.
1. Never Risk Money You Can’t Afford to Lose
This means that, though tempting, the share market is not the place for your emergency savings or home deposit (if you are in the process of house hunting). Share markets are volatile and can at times take months or even years to recover. For this reason, it is important to have control over the decision of when to sell an investment — this is control that you do not have if you urgently need to sell your shares to buy a new fridge or settle on a property purchase.
2. Set Ultra-Specific Goals
By being very specific about what it is you want to achieve, you’ll start to narrow down your investment options, which is then going to increase the odds of you achieving your goals.
For example, deciding whether you want a profit or a regular income will help you narrow down what sort of shares you want to invest in. If you want a regular income, then you’re going to be looking at shares that are paying good dividends. If you’re just seeking a profit, then you may be focused on shares that perhaps are paying no or little dividends, but ones that you think may go up in value.
The same goes for investing in property. Do you want to buy in the next boom area and make a profit from the eventual property sale, or are you looking for a property that is going to give you a regular rental income (which potentially pays for the loan costs, maintenance costs and so on)?
The more clarity you have on your investment goals, the easier it is to pick your investments.
3. Do Your Homework
When picking an investment, it is crucial that you know what you’re getting yourself into and why and that you are not making impulsive decisions based on what you have heard on the news or in an online forum.
Whether you decide to engage experts or get advice from an online forum, you still need be the one to make the final call. To do this, you have to be informed enough to understand why they’re making their recommendations and whether you agree with their opinion.
If something isn’t making sense to you, don’t feel like you’re being silly for asking questions. The devil is often in the detail. Keep asking more questions until you feel comfortable to form your own opinion.
4. Allow a Realistic Timeframe
Whether you’re investing in shares, property or any other type of asset class, remember that they are long-term investments with a minimum five year investment timeframe.
This doesn’t mean that if the investment has gone well that you can’t sell it within a shorter timeframe. This is more about being prepared (mentally and financially) to wait for your investment to make a profit, which can sometimes take months and at other times years.
5. Don’t Rely on Past Performance
While past performance is a helpful research tool, it should not be the only criteria for making your decision. Whether it is the property market, cryptocurrency, shares or managed funds, just because an investment has performed well in the past, doesn’t mean it’s guaranteed to continue to do well in the future.
6. Don’t Forget About Tax
All investments carry tax implications, so it’s really important to seek tax advice. In the case of shares, the dividend income needs to be declared each year in your tax return, as will the profit from the sale of any investments. A good tax accountant can help you understand your tax obligations, as well as offer guidance on how to invest in the most tax-effective manner.
7. Don’t Put All Your Eggs in One Basket
Regardless of how much or how little you invest, the aim of the game is to reduce your risk and maximise your profit. One of the best ways to do that is by spreading out your investments and not having all your money sitting in the one place. Diversification will give you maximum control over your money and will mean that you are not at the mercy of your investments.
When most investors start out, they typically take a very high-risk approach to investing without even realising it. They buy a parcel of shares or an investment property with very little research. What’s more, they often aren’t clear on their ‘why’ or what their overall financial strategy is, meaning they take a scattergun approach to their investments, which can be a recipe for disaster.
The key to successful investing is to first understand the difference between being an investor and a speculator. A speculator relies heavily on chance. A true investor, however, is focused on building wealth in the long run and is interested in maximising their returns while minimising their risk. The most effective way to do this is through diversification and by becoming an informed investor who knows what questions to ask and when it is time to seek professional advice.
Natasha Janssens is a Certified Money Coach (CMC)® and founder of Women with Cents. She is an award winning financial educator with a passion for supporting women to transform their relationship with money. If you don’t know what you don’t know when it comes to money and financial matters, her book Wonder Woman’s Guide to Money is for you. For more of Natasha’s tips follow her on Instagram and take the Money Type Quiz.