What are the 4 Rules of Investing?

What are the 4 Rules of Investing?

This is a guest post by Christopher Russell of TheStockDork.com

As an investor, you dedicate your hard-earned money to one or multiple financial schemes, property, commercial ventures, or shares, expecting to achieve a profit or an increase in value over time. Therefore, this calls for investing in things that you understand but doesn’t mean you should restrict yourself to industries of your expertise only. As long as you know how an investment functions, you are good to go. For example, if you intend to capitalize on home security systems by incorporating home security stocks in your portfolio, familiarizing yourself with the best private security stocks to buy is critical.

So, besides understanding your investment’s objective, here are the other four rules that will form the foundation of your investment plan.

Invest for the Long-Term

While making your investments, you should always keep the long run in mind. Most investors who are only interested in gaining short-term profits are more exposed to losing their patience, especially when exchange rates fluctuate. That’s not all, as the portfolio’s performance tends to sink every time an investor investing for the short-term exits one position and enters a new one. Instead, it would be best to aim at investing in assets that you intend to retain long-term. Long-term investing like legend Warren Buffet’s viewpoint of forever as the optimal holding period for shares can focus and increase the value of your decision making to only the best companies at the right prices. 

Focus on Valuations

Valuation is one key figure that is particularly significant to all investors. In enterprise participation, the firm valuation plays a substantial role in determining whether the investment you are targeting is lucrative or not. You don’t want to spend more on a company’s earnings and upcoming growth prospects than necessary. You have many different ways of calculating a company’s value before investing in it. For instance, looking at a company’s development in recent years can help you calculate the company value of different listed firms through the detailed financial figures method. And based on your findings, you can easily derive a realistic projection of how the firm could continue to create cash flow and grow.

Calculate Real Return

Eventually, the return is the decisive figure by which you choose if an investment is lucrative for you or not. The key is to focus on the real return instead of the nominal return. And that is the actual return adjusted for transaction costs, taxes, and inflation. While nominal returns could help, they are often confusing since only real return expresses an accurate increase in buying power without alteration.

Observe Timing and Position Size

As an investor, you need patience. Therefore, after identifying an excellent investment, your next move should be patiently waiting for the appropriate time to involve yourself in the investment. Sometimes, the right time to apply can be right then and there, which works to your advantage. However, other times it might be months or years later. But the key is to prepare yourself adequately as that time nears. Remember that the investment market provides enough chances, so avoid jumping on the next best opportunity. Learn to always ask how high the stakes are when an investment opportunity presents itself.

Final Word

Whether you are a market veteran or are new to investing, the above time-tested tips and fundamentals in investing can help you build your fortune. And even as you follow them, don’t forget to diversify risks, keep costs down, and avoid trusting temporary trends.

You can follow Chris on Twitter @TheStockDork.

What are the 4 Rules of Investing?
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