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The Three Rules of Investing

Is investing easy or difficult? Like most things in life, it isn’t either/or; it’s both/and. The rules of investing are simple to understand, and most are able to accept them. However, it’s a different thing entirely to actually follow them.

The rules of getting into better physical shape are typically fairly straightforward: eat less and exercise more. However, many have tried only to fail. Is it because the rules don’t work? No. Most of the time, it’s because they fail to follow the rules. To get into better physical shape, the hard part isn’t acknowledging the rules; it’s following them. The same is true of getting into better financial shape.

The rules of investing are verbs. They aren’t things you know; they’re things you do. To become a successful investor, these are the things you will need to put into practice:

  1. Own Equities. Don’t confuse activity with productivity. Wall Street thrives on your compulsion to buy and sell frantically as markets fluctuate. Traders don’t make money unless you’re worried enough to sell at the sign of every tremor. Don’t give in to the fear. In the long run, equity mutual funds will compound your money and outpace inflation. Most investors only own their equities for an average of three years. Don’t be those investors. Instead, try a little of that sweetest of human virtues: patience.
  2. Diversify. I’m sure you’ve heard the old adage, “Don’t put all of your eggs into one basket.” This proverb can be no truer than it is in investing. Ever heard of Enron? Napster? Circuit City? At their peaks, these publicly-traded companies were considered titans in their respective industries. Now, they are merely footnotes of American history. Don’t invest all of your money in one company…or even in one industry. Diversifying means spreading your money around to companies of different magnitudes in a variety of sectors. Companies will die. Entire industries will die. Don’t let all of your money die with them.
  3. Rebalance. Markets are volatile. That’s just their nature. You can’t control it; you can only prepare for it. Rebalancing isn’t about having a portfolio that is predictive of the future; it’s about having a portfolio that is responsive to the present. Once you have decided on the appropriate percentages for your unique portfolio (something you should have already determined before investing a cent), rebalancing means adjusting the assortment based on everyday changes to the market. It’s the golden rule of investing: buy when prices are low and sell when prices are high.

Knowing the rules is easy; following the rules is hard. Moreover, the rules will mean something slightly different to everyone. Your unique financial situation will make the rules more nuanced. Which equities should you own? How should you diversify? What needs rebalanced in your portfolio? Contact us for a free consultation on understanding your unique answers to these questions. We would love the opportunity to help you develop a roadmap for executing the three rules of investing and turning your financial dreams into a reality.

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