8 Principles of Investing Every Young Professional Should Live By

The earlier you start investing, the more wealth you’ll build. However, It can be challenging to start investing early. Your income has to accommodate big purchases, and other expenses leaving you with little to invest.  

Besides, you’re prone to make beginner investment mistakes if you have very little knowledge about the investment instruments available. To help you avoid these mistakes, here are 8 principles that every young investor should live by.

1. Leverage the Power of Compound Interest

“If you understand compound interest, you basically understand the universe” Robert Breault

The power or magic of compound interest can best be understood when you compare it to simple interest. With simple interest, you only earn interest on the principal.  But with compound interest, you earn interest not only on the original investment but also on the accumulated interest from previous periods. 

To leverage the power of compound interest, start investing early. The sooner you begin reinvesting interest, the more compound interest you’ll earn.  It’s like a snowball rolling down a hill. The longer it rolls, the bigger it gets.

The snowball effect can cause interest to grow exponentially over time, providing a major boost to investment returns. So, invest in a compound interest-bearing account to build a  fat nest egg for your retirement or bigger investments.

Investments that harness the power of compound interest include:

• Money Market Funds.
• A Fixed Deposit Account.
• Saccos.
• Pension Funds.
• Government and Treasury Bonds.

Also read: Where Do I Keep My Savings. Money Market Fund

2. Diversify Your Portfolio

One of the golden rules of investing is to diversify your portfolio. This means investing in assets with varying degrees of risk and not putting all your eggs in one basket. You could for instance invest in unit trusts and also in stocks and bonds with the hope that if some of your investments perform poorly, others will perform well.

Although diversification doesn’t ensure profit or guarantee against loss, it can help mitigate the risk and volatility in your portfolio. 

Here are a few tips for diversifying your investments.

• Put a portion of your portfolio into fixed income assets like bonds 
• Consider adding real estate to the mix
• Keep building your portfolio
• Rebalance your asset allocation periodically

Also read:   7 Ideas to Diversify Your Sources of Income

3. Invest for the Long term

Investing for the long term is one of the smartest things you can do for your financial future. Remember the power of compound interest? 

The longer you invest, the more time your money has to grow. This can result in a much larger return on your investment than if you were to only invest for a short period of time.

There are a few different ways to invest for the long term. These include:

• Stocks: When you invest in stocks, you are buying a piece of a company that will be worth more in the future. Over time, if the value of the company increases, so will the value of your investment.

• Bonds: These are loans that you make to a company or government. The company or government then pays you back over time, with interest.

• Real estate: Real estate is considered one of the safest long-term investments. However, it often requires a larger upfront investment.

• Precious metals like gold and silver: Although they may not offer the same potential for growth as other investments, they can be a good way to hedge against inflation.

Although investing for the long term can be a bit risky, the potential rewards are worth it. For instance, it ensures you have enough money to support yourself in retirement.  So start investing today and watch your money grow over time.

If you are not sure where to start, talk to a financial advisor about how to create a long-term investment plan that meets your needs.

Also read: Investing In Your 20s - A Beginners Guide

4. Invest with a Margin of Safety

When investing, always remember to leave a margin of safety. This means having a cushion in case the investment goes sour.  

By investing with a margin of safety, you can help protect yourself from losses and ensure that your investment portfolio remains healthy.

There are a few different ways to approach creating a margin of safety:

• Invest in a diversified mix of assets. As we mentioned earlier, diversification gives you the benefit of not putting all your eggs in one basket. 

• Focus on companies that have a strong track record of performance and are trading at a reasonable price.

• Companies with strong balance sheets are another good option. These companies have a strong financial foundation and are less likely to experience financial difficulties in the event of an economic downturn.

No matter what approach you take, always remember to leave yourself a margin of safety. This will help you sleep better at night knowing that you're prepared for the worst-case scenario.

Also read: Ways to Invest When You Have a Low-Risk Tolerance

5. Keep Expenses Low

The lower your expenses are, the higher your potential return on investment will be. There are a number of ways to keep your expenses low when investing:

• Invest in index funds. Index funds are a type of investment that tracks a group of stocks. They tend to have lower fees than other types of investments and are thus ideal if you're looking to keep your expenses low.

• Use a Robo-advisor. Robo-advisors are online investment platforms that offer automated investment management. They have lower fees than traditional financial advisors. In March 2022, the Capital Markets Authority (CMA) approved the rollout of the first Robo-advisor from the regulatory sandbox.

• Invest in companies that have low expense ratios. Expense ratios are the fees that mutual funds and other investment vehicles charge. Companies with low expense ratios typically have lower fees, making them a great option for those looking to keep their expenses low.

Also read: 5 Investing Risk Factors and How to Avoid Them

6. Review and Rebalance Your Portfolio Regularly

It's important to review your investment portfolio regularly and rebalance it as needed. This helps ensure that your investments are aligned with your goals and risk tolerance.

If your goals have changed, or if your portfolio has become too risky or too conservative, then rebalancing can help get you back on track. By doing this, you can help ensure that your portfolio continues to meet your needs.

While it's important to review your portfolio regularly, you don't need to do it too often. Once a year is usually sufficient. If you're concerned about a particular investment, or if there have been major changes in the markets, then you may want to review more frequently. 

7. Invest Regularly

By investing regularly, you can save on costs. Investing regularly means investing a fixed amount of money into your investment account on a regular basis, such as monthly or quarterly. 

By doing this, you can take advantage of dollar-cost averaging, which essentially means that you'll be buying more shares when prices are low and fewer shares when prices are high. Over time, this can help to reduce the overall cost of your investment portfolio. 

Also read: 7 Common Investing Mistakes to Avoid

8. Have a plan

If you want to be successful in investing, you need to have a plan that is tailored to your specific needs. Your plan should take into account your current financial situation, your long-term goals, and your tolerance for risk. 

It should provide a roadmap for how to achieve your goals, including what types of investments to make and when to sell them.

Creating an investment plan can seem daunting, but it is well worth the effort. Having a plan will help you stay disciplined and focused on your goals, and it can help you avoid making costly mistakes.

Also read: 10 Long-Term Goals To Start Today

Wrapping it Up

Investment is an integral part of everyone's life and as a young professional, it's essential to make wise decisions with your money. With the help of investment, you can secure your future and enjoy a luxurious life. 

Even so, it's not always easy to find the right investment opportunities.  Hopefully. these 8 principles will guide you to make the most of your investment opportunities