Today, we are going to talk about another 5 commandments of investing and if you are still unsure whether you should start, let us debunk 2 top common myths first before continuing with the rest. The 2 common myths are market volatility and that investing is time consuming.
This looks daunting to some people because it is an uncharted territory for them. Why? Because they heard about negative experiences from their family members or friends, it makes them feel investing is not “good” as the stock market is too volatile.
However, even when there is day to day or year to year volatility in the stock market, the trend line tends to smoothen out over time and in an upward direction. Trying to time the market will cause problems for your portfolio but if you invest with a long term mentality, it is possible to get through the market volatility and come out as a winner.
It is not rare or hard to imagine an investor, meticulously screening reports and spending hours adjusting stock screeners to get the right stock at just the right time. The truth aka good news is that it does not have to be time consuming. A broad based fund does not need a lot of research and with today’s technology, you have robo advisors at your back to help build a portfolio based on your long term goals and risk tolerance in just a few minutes.
Now that we have debunked the 2 top common myths, let’s talk about the last five commandments of investing which helps to speed up your journey:
1. Simple is best
As the saying goes, simple is best. Invest within your understanding limits and and the simpler, the better. Do not go into complicated investments that consume a lot of your time due to trying to time the market. Set up automatic purchase plans that help you stay grounded so you will not feel tempted to try and time the market.
Staying invested at all times means you are using dollar cost averaging to buy more shares with the same amount of capital and that is how you can maximise your money. Consider low cost index funds or exchange-traded funds (ETFs) if you are unsure or uncomfortable with rebalancing the portfolio so the stress of DIY investing can be eliminated. A wise option is to use robo advisors as mentioned earlier.
2. Do not put all the eggs into one basket
When it comes to investing, it is always advisable not to put all eggs in one basket because why risk losing it all when unforeseen circumstances happen? Practice diversification instead as it spreads your investments around and limits exposure to any one type of asset, lowering your overall portfolio risk and improving your returns in the long term.
Do take note that while diversification is great, over-diversification is not. This happens when there are too many assets with similar correlations and it ends up increasing your portfolio risk which in turn lowers your potential returns. This is also referred to as diworsification.
3. Rebalance your portfolio annually
While you should invest with the long term in mind, it does not mean you can set your portfolio and leave it alone forever. A good strategy is to review your portfolio annually to ensure that assets remain allocated in a proportionate manner that fits your risk tolerance and overall strategy.
We go through different stages in life and will need to adjust our risk appetites and strategy accordingly. Different assets will perform differently over the course of time and the review is a good time to reallocate assets back to target and in tune with your risk tolerance. It might also mean buying of more assets that have declined in value and selling off some assets that have performed well.
4. Educate yourself
When you look at the people who make lucrative money from investments, you will realize many of them are knowledgeable about investing and that means you also need to start educating yourself by picking up the necessary knowledge so that you can make informed decisions.
Knowledge is power and it is no surprise that the richest among us are also one of the most voracious readers. Study, learn from others and make your own decisions. At times, errors are inevitable but investing is a lifelong journey as the market is always subject to changes. It is a commitment until you cash out totally.
5. Cut the costs
High and unrewarding investments will significantly reduce your returns in the long term and leave a foul taste in your mouth. Not all investment fees are bad but there must be a balance between the fees spent and returns you receive just like how a business monitors its profit loss margin.
Most of the high Management Expense Ratios (MER) charged by active fund managers are not rewarding. Transaction costs are also something to watch out for if you are trading ETFs or stocks actively. Fees can add up to rob you of better returns on your investment capital and these include front-end loads, back-end loads, MER and brokerage commissions etc.
Investing is an art and you should not go into it blindly. Achieving success with it is a skill. This requires knowledge and practice to be fine tuned continually over time. We hope you will enjoy learning about investing just as much as you receive lucrative returns. Happy investing!