Investing? So many questions surrounding investing; where should you start? Establishing a mindset that encourages and supports investing is the first step in the right direction to liberating your thoughts to explore new avenues financially. This article will be the resource for a 7 step process to begin your investing journal and focus your mind-set on achieving your financial goals. Therefore, if you want to learn how to invest here are 7 investing principles to help set the frame-work for solid investments.
How and why this ethos was developed?
I knew I wanted to invest…I knew I wanted to establish a legacy for my family. I just did not know where to start and how I should invest.
Without many options to refer back to I turned my attention to academics and became comfortable with the theoretical notion presented by higher education. Used knowledge attained and applied it to the first opportunity I had to invest.
Following are the A Small Investment 7 investing principles I’ve learned, and wish I would have known when I started investing.
ASI Principle 1: Move when you’re comfortable
Investing should be done at a pace that’s comfortable to you. I believe in performing thorough research on potential investments and I do not invest unless the investments meet the 7 principles outlined in this article.
If you decide to invest on your own or hire a financial advisor to assist you in your investing decisions, insure that you’re comfortable with the potential investment. For example, I add potential investments to a watch list, and research as well as observe the investments to determine if the investment aligns with my personal investing goals.
ASI Principle 2: Determine your personal risk tolerance
What’s your personal risk tolerance? How much risk are you willing to subdue in order to achieve the goal you set forth for your investments?
The less risky the investment options the less return you will see on your money, and the opposite result for riskier investments. There are various rules of thumb floating around in the financial arena.
However, the one that provides insight for a solid starting point is take your age minus 100 and this is the amount of equity investment you send be invested into. For example, if you are 40 years old you should invest 60% in stocks or similar investments, and 40% in cash and bonds (little to no risk).
Keep this rule of thumb in mind when you are considering how much to invest in stocks ( equities ) and bonds and cash.
ASI Principle 3: Invest for the long-term
Your investing ability comes at the opportunity cost of doing/not doing something with the money you invested. For instance, you could utilize your money to invest or spend it on anything else for immediate gain (or sometimes loss).
I invest with a long-term outlook for my investments. For instance, an investment made today is similar to advancing money to my future self and family.
Whereas, paying loans is reducing the money I can utilize for my future self and family. Therefore, investors should use a buy and hold strategy where the investments are monitored on a periodically basis, and compared to the financial goal you would like to exceed.
ASI Principle 4: Diversify your investments
Never have all your eggs in one basket. We’ve all heard this saying before, but when it comes to investing you must diversify your portfolio and not have all your investments in one sector/industry or all in CD’s, Bonds, or stocks.
Having a mix of these investments will allow you the peace of mind to sleep well knowing that a dip in oil prices will not have a major effect on your portfolio. For example, if the majority of your investments are in the technology industry or supporting this industry then you are more vulnerable to swings in the market.
Therefore, reduce your vulnerability and diversify your investments.
ASI Principle 5: Buy when others are selling
When you are investing you are partial to market trends and getting caught up in those trends are easy but must be avoided at all cost. When investing it is necessary to eliminate the noise and focus on the main trends in the market to counteract what the mainstream investor and what they are doing ( they will make you rich by the way). Allow me to explain.
When the mainstream investors are selling to avoid the bottom of the market that is the time you should buy. On the other hand, when the majority of investors are bullish on the market (optimistic that the market will continue to rise) average investors will buy more when they have a positive outcome on the market.
However, number 5 of 7 investing principles is to not follow the average investors. Do not follow the pack actually be a leader and do the opposite of the pack. Buy when others are selling and sell when others are buying.
ASI Principle 6: Assign letter grades to investments in your portfolio
Once you have investments or potential investments that you assigned to your watch list monitor their activity, and assign a letter grade from ‘A’ to ‘F’. For example, I have been watching various ETFs (exchange traded funds) in the technology sector to improve my holdings in this sector.
One ETF on my watch list has more loses than gains compared to the remaining four investments on my watch list. This potential investment has received a ‘D’, and I flagged the investment as do not buy.
I only want to buy investments with a self assigned A value and some cases B value, but nothing lower than a ‘B’. Therefore, as I diversify my investments, and watch for new investments I want to add to my portfolio I make sure I have at least 5 potential investments to track and assign letter grades to those investments.
And eventually buy the investment I self assigned with an ‘A’.
ASI Principle 7: When the wind blows do not get carried away
The last principle number 7, the number of completion is to stand solid on your investment choices and do not waver.
Financial markets go through cycles similar to waves, and this should be expected when you invest in any capacity. The money you invest will not always achieve extraordinary returns, and when the wind starts to push the waves higher realize that high waves must come back down before going back up.
Therefore, do not get overly excited about great dips or vast gains in the market.
Know that the wind may blow and cause you to ride the wave and not bail.
The 7 principles above can and should be used as 7 step guide to investing. Engrave these 7 principles in all of your investment decisions, and you will have the baseline for establishing your investment portfolio.