Investing, whether as a passive income source or as a full-time business, is a great way to grow your savings. From Warren Buffett to George Soros, you’ve probably heard of the rags-to-riches stories of dozens of men and women who changed their lives by betting big on the right companies, properties, precious metals, and other invest-able assets. That said, you are doing yourself a great disservice by only considering the positive side of investing. One must fully acknowledge the presence and probability of capital risk as well in order to succeed.
Here are five basic rules to live by if you want to make money as an investor.
1. Protect Your Capital First and Foremost
If you will only follow one rule, let it be this. Always protect your existing capital before you try to make money with it. In the pursuit of trying to squeeze a buck from their $100 investment account, inexperienced investors risk losing at least twice that amount. Over time, this skewed risk-reward ratio eventually leads to their account blowing up. Protect your capital by using only a fraction of the available funds, employing target profits and stop losses, diversifying your portfolio, and avoiding times of extreme market volatility.
2. Leverage Compound Interest
Investing as early as you can have a significant impact on your long-term returns as an investor. This is all thanks to a mechanism called compounding interest, which turns seemingly small amounts into a big nest egg over time. The sooner you start investing in assets that generate a steadily increasing ROI, the better your money works for you. Say you start investing at the age of 25. You put in $380 every month into your investment account. Even at a conservative 7% annual return, you can grow the account to over $1 million in a 40-year time frame.
3. Always Have Probability in Your Favor
Taking risks isn’t enough to succeed as an investor; you need to take calculated risks that tilt the probability of profit in your favor. For instance, before you buy New Zealand Kiwi with your US dollars, identify your reason/s for doing so. It could be a broad risk-on market sentiment, a significantly lower unemployment rate reported by NZ, governmental disarray coming from the US, or any other pertinent reason that justifies your position. Taking a position solely because everyone else is doing it can result in huge losses over time. The recent price surge in Gamestop and AMC are timely examples of this detrimental way of investing. While these two stocks did enjoy several days of bullish price action, they ended up reversing sharply back down, destroying any profits that investors made and creating losses for those who entered the market late.
4. Only Invest in Things You Understand
Investing in something you don’t understand violates the aforementioned rule of having the odds in your favor. Even if you do manage to make money from an initial investment that you took solely because of a tip from a friend or coworker, it’s not a viable long-term investment plan. Instead, specialize in a handful of assets that interest you, such as growth stocks, IPO stocks, foreign currencies, oil futures, binary options, real estate, etc. For instance, if you are getting involved in real estate investing, you’ll want to have a good understanding of real estate jargon, such as DST meaning, and relevant policies and regulations that cover this particular space.
5. Keep Your Investing Simple
Investing with dozens of technical indicators on your price charts and reading a number of financial articles and blog posts beforehand does nothing to actually change the outcome of your investment; it does not protect you from sustaining a loss and might actually cause you to miss obvious signs of a potentially profitable investment. Keeping your investing routine simple and minimalistic is a good long-term strategy as it allows you to move with the flow of the market rather than against it. The more complex and multifaceted your approach is, the more stressful investing becomes. Keep your charts clean and your method straightforward manage risk.
Ultimately, it all boils down to how effectively you can manage risk. A good risk-reward ratio combined with a high-probability strategy will always produce positive gains over time. Find or build a strategy that can make you at least $2 for every $1 you risk and stick to it.