5 Simple Rules for Investing Success

“Definiteness of purpose or single-mindedness combined with PMA (positive mental attitude) is the starting point of all worthwhile achievement. It means that you should have one high, desirable, outstanding goal and keep it ever before you.” W. Clement Stone

Investing is a mental game. And to be successful at the mental game, you must adjust your mindset and retrain your thinking that as a long-term investor, you need to be able to buy stocks and open new positions when the market is crashing or correcting. You’re genetically programmed to be a lousy investor. You must set up systems and rules to fight our normal urges and invest at what appears to be the absolute worst time and when everyone else is fearful and selling.

It is important to accept the fact that you will absolutely enter a position at the wrong time and make a bad buy in the short term. It happens to every investor at sometime in their life.

Investing doesn’t have to be intimidating or challenging. To get started investing in stocks and bonds, you should follow with deliberate purpose and action five simple rules for building a long-term portfolio, according to TD Ameritrade:

Contribute early and often – The single most important thing you can do in investing is to invest early and save often. Thanks to the magic of compounding, money invested early has more time to grow. Delaying investing can have a significant effect on your portfolio. In fact, for every 10 years you wait before starting to investing, you’ll need to save roughly three times as much every month in order to catch up.
Minimize fees and taxes – Charges and taxes will have an impact on your overall returns, so it’s important to take these into consideration when choosing your investments.
Diversify your portfolio – We all know the saying ‘don’t put all your eggs in one basket’, but it’s particularly important to apply this rule when investing. Spreading your money across a range of different types of assets and geographical areas means you won’t be depending too heavily on one kind of investment or region. That means if one of them performs badly, some of your other investments might make up for these losses, although there are no guarantees.
Consider how much time you have – Investing should never be considered a ‘get rich quick’ scheme. You need to remain invested for at least ten years, but preferably much longer to give your investments the best chance of providing the returns you’re hoping for. Even then you must be comfortable accepting the risk that you could get less than you put in. If your investment goals are short-term, for example, two or three years away, investing won’t be right for you, as you’ll need to keep your money readily accessible, usually in a savings account.
Have a financial plan and focus on long-term goals – A financial plan creates a roadmap for your money and helps you achieve your goals. It is a comprehensive picture of your current finances, your financial goals and any strategies you’ve set to achieve those goals. Good financial planning should include details about your cash flow, savings, debt, investments, insurance and any other elements of your financial life. Knowing what your financial goals are and what sort of timeframe you are investing over may help you stick to your plan and strategy. For example, if you have long-terms goals, perhaps saving for retirement which may be several decades away, you may be less tempted to dip into your investments before you stop work.

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And, never forget the top two and oldest rules for investors, according to Warren Buffet:

Rule #1 of investing is “Don’t Lose Money.”
Rule #2 is “Don’t forget rule #1.”

What Buffett is referring to is a state of mind and philosophy for investing. Simply, it means that there’s no such thing as “play money.” You don’t go out and speculate on a stock. You remain patient and disciplined, whether your tax deferred or brokerage accounts are up or down for the month or year.

Investing is not gambling and the stock market is not a casino. There’s no such thing as the house’s money in investing. It’s all your money, and it has to be protected.

So, don’t become anchored to the price of stocks, instead focus on buying good businesses at fair prices. Only thing that truly matters in investing is the long-term future prospects (innovation, moat, management acumen) and growth opportunities of businesses. Don’t let the loss in the price of a stock get in your head and don’t let a short-term paper loss sway your emotions, behaviors or actions.

Better to be a regular investor rather than be perfect or optimize to price of the stock. And remember, celebrate good stock buys, and recognize and learn from bad buys.

References:

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