Money Management
November 11, 2024
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Like most people, you know that you need to invest. With inflation rising, it is the only way to protect the value of your money. Additionally, you want to see your money working for you and helping you reach more significant financial milestones your attractive salary can’t help you achieve. But before you delve deeper into the investment world, you need to know the rules to help you invest better.
Once you are ready to start investing, you must develop an investor's habit. These qualities will help you stay on course and avoid destruction. They will help you stay rational and disciplined. You will be able to avoid impulsive decisions.
You can't develop those habits overnight. It starts with familiarising yourself with the rules of investing.
This article will explore ten golden rules of investing you need to follow to be a successful investor.
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There is a typical personal finance adage that says, "the best day to start investing is yesterday." But if you didn't have money, then, today is the perfect day to kick-start your journey. Starting to invest early has many benefits, but the primary ones are developing money discipline, building wealth, and reaching financial independence faster.
Here is how.
First, you will get to enjoy the magic of compounding. This happens when your investment returns are reinvested to create a snowballing effect. The earlier you start investing, the more your returns compounded, leading to more fund growth.
Second, investing is all about taking risks. When you start early, in your 20s or 30s, you can take more risks, and if things go south, you have more time to recover. But if you start investing as you approach retirement, you must be conservative to preserve your money.
Thirdly, you will be able to reach your goals faster. If you plan to retire earlier or buy a house before you reach the age of 50, you will need to start saving and investing now.
Read Also: 5 Reasons Why You Should Start Investing Early
When Charles was 33, he decided to take a risk and invest all his life savings worth Ksh800,000. This was back in 2018. After researching, he decided to buy a car using all his savings to start an uber business. He was expecting Ksh3,000 in profits per day.
Business was good for the first two months, and after all deductions, Charles managed to save Ksh100,000. But all hell broke loose at the start of the third month. His driver was involved in an accident while drunk driving. Charles' insurance claim was declined, and his car was damaged beyond repair. He had to sell it for scraps and could barely raise Ksh100k.
Charles put all his savings into one investment. Within three months, he had lost all his money. To avoid such a mistake, you must follow the investing rule: Always diversify your investments.
Diversification involves spreading your money across different investment vehicles with different risk profiles. Rather than using all your savings to start one business, you can invest it in four or five other investments. Diversification is important because of three main reasons:
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Before you start investing, it is crucial that you know why you are investing. Your goals will help you create realistic plans. And not to mention different goals require different investment strategies.
Think of it this way. How you build your emergency funds will differ from how you invest for retirement. The former will require a capital preservation strategy, while the latter will require a growth strategy. Simply put, you will need to invest your rainy day funds in cash equivalents liquid instruments like MMFs, and your retirement fund is long-term assets like real estate.
Knowing your investment goals also allows you to set S.M.A.R.T. goals. You will be able to create specific and clear plans, measure progress, assign timelines, know how much you need to invest and avoid surprises in the future. You will be able to set goals within your reach, i.e., attainable.
Knowing your investment goals will help you allocate your assets carefully. This will ensure you improve performance, lower risks, and reduce investment costs.
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In today's world, everyone is masquerading as a financial advisor. Your friends and family always tell you how you need to invest your money, citing their success stories to inspire you. You go online, and your social media is full of investment opportunities promising to 10x your money in seconds.
But the biggest blunder you could make when investing is blindly following another person's advice. And there are a couple of reasons for this.
First, you have different risk tolerance. How will you react if you and your friend each invest Ksh200,000 in stock and it loses half its value three weeks later? Can you handle the loss or keep holding for a future miracle? Or will you panic and resell? Your friend might be able to count their losses, but you need to ask yourself if you can do the same thing before you copy their strategy.
Second, you can't hold someone accountable when their advice causes you to lose money. Your favourite Instagram influencer will tell you to buy cryptocurrencies on a particular platform. When you buy and sell later for a profit, you will thank them. But when you buy and lose money, you can't go back to them asking them to help you recover your losses.
With that in mind, before you put your money anywhere, take your time to research the investment. Understand the risks involved, their certification, history, and whether they are regulated or your investment is insured. This will help you avoid potential losses down the road.
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To determine your risk appetite, you need to know how much risk you are prepared to take to achieve your goals. Your personal circumstances and financial objectives will inform this. Once you know your risk appetite, you can decide if a particular risk is worth taking.
Your risk appetite will help you find a sweet spot when investing. You won't be able to over- or underestimate the amount of risk appropriate for you. Taking a different path can hinder you from achieving your objectives.
If you overestimate your risk appetite, you will likely make investments outside your comfort level. This can lead to stress and anxiety, forcing you to liquidate at a loss during the market downturn. You should only invest in risky instruments when ready to withstand volatility.
Underestimating your risk appetite will also hurt your investment goals. Being more conservative when investing can lead to lower returns, slowing your wealth-building goals. Additionally, you will miss out on investment opportunities that could have made you wealthier.
Read Also: Ways to Invest When You Have a Low-Risk Tolerance
Keeping your emotions in check when investing is easier said than done. After all, it is your hard-earned money and financial future at stake. But when you let emotions control your decision-making process, you will likely hinder your long-term investing success.
Fear is the biggest emotion you need to control when investing. The fear of missing out on potentially higher returns can lead to overconfidence when investing. Inversely, the fear of losing too much can cause you to panic and exit your market position at a loss or prevent you from investing.
Other emotions that can affect your investing are greed, jealousy, and envy. Greed can lead you to a self-destructive path and illegal investment that could expose you to life-threatening risks. Jealousy and envy will lock you in unhealthy competition with your peers that could prevent you from making rational decisions.
You must stay focused on your goals to keep your emotions under control when investing. Understand that everyone is on their own path, and you will achieve nothing by comparing or competing with them. Create a clear investment strategy tailored to your needs, and always weigh all your options before making crucial money decisions.
Read Also: How Fear, Guilt, Shame and Envy Affect Your Financial Goals
Market timing refers to an investment strategy where an investor tries to identify the best times to invest and when to get out. When done well, it can result in higher returns. However, it's a risky move because changes in market trends can appear suddenly and randomly.
Most people who time the market usually depend on history, but as an investor, you should know that past returns don't guarantee future returns. Additionally, it is hard to predict short-term market movements.
To avoid timing the market, you need to do three things.
Read Also: 7 Common Investing Mistakes To Avoid
To ensure that your investments are keeping you on track to achieve your goals, you need to review their performance regularly. Over the course of a year, your portfolio can change significantly. Some investments might lose value, and others appreciate. Rebalancing ensures that your portfolio doesn't divert from its original form and exposes you to diversification risks.
There's no optimal time to rebalance your portfolio. It will usually depend on your investment goals. For instance, you can rebalance your retirement portfolio once a year and your kid's education investment Once per quarter.
But when it comes to reviews, you should do it regularly. This will help you identify patterns you can use to your advantage.
The reason for conducting regular reviews and rebalancing is to maintain a balanced portfolio according to your risk profile. Therefore, when reviewing your portfolio, leave emotions outside the door. This will ensure you allocate your assets per your goals and time horizon.
Read Also: 5 Investing Risk Factors and How to Avoid Them
As an investor, it's important to keep yourself informed for multiple reasons. First, you will be able to stay on top of regulatory trends affecting your investment. For example, if interest rates are rising, you will avoid long-term bonds as they offer fixed rates that could have lower returns. And if you want to take a mortgage and foresee a drop in rates, you will take a variable-interest mortgage.
Second, you can avoid scams that take advantage of victims' ignorance. Every day, scammers keep coming up with ways to steal from people. As an informed investor, you need to be able to stay ahead of them.
Finally, being informed will help you make better investment decisions. You will be able to understand risks and create a mitigation strategy. You will be able to maximise your returns and lower your losses.
To keep yourself financially informed, you should consume financial content from trusted sources and keep up with business news. This will help you know different economic and regulatory reforms and how they affect your investment.
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Nobody is born an expert. Once in a while, you will have doubts and start second-guessing your decisions. Instead of arriving at half-backed conclusions that might cause you to lose money, you should seek professional advice.
The best approach is to talk to a licensed financial advisor. They will help you understand the implications of your investment decisions from all angles and offer expert advice. They can help you make more informed decisions that can help you get the best out of your money.
Contrary to popular belief, financial advice is not only required by the very rich or someone who has received a windfall. Far from it. You should consider seeking financial advice when creating an investment plan, building your portfolio, planning your estate, and everything else.
Read Also: 6 Reasons to Have a Financial Advisor In Your 20s and 30s
As you have read throughout the article, investing is a risky affair. On one hand, you want to grow your money; on the other, you risk losing it. To lower your risk exposure, you need two things.
One, you must think long-term. Investments have a way of fluctuating over time. As an investor, you should prepare to face volatility. Preparation will prevent you from panicking.
Second, always have a fallback plan. The best way to do this is to keep an emergency fund and invest in insurance. They will prevent you from having to sell your investment during a crisis. Additionally, you will be more confident to invest towards your goals when you have a contingency in place.
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