When you’re considering starting investing there are so many bits of ‘advice’ that you’ll hear that you may quickly find yourself overwhelmed and confused. The fact is however that there really are only 3 Rules that you need to follow, at least when you’re just starting out, and they will form a very good jump-off point for more learning while you earn.
Tip 1) Investing is NOT easy. In fact, it’s extremely hard to do it ‘right’. All the due diligence in the world, all the research, all the data that you can find is wonderful but, at the end of the day, a stock that looks like a winner on Monday may be a complete loser on Tuesday. There will be reasons why it happened, of course. Foreign sales have slumped, there was a glitch in the product pipeline, it snowed early in the West, etc., etc. Some reason may actually make sense and appear to be ‘no-brainers’ and some fact pattern will say ‘I told you so’ while others will make no sense and leave you scratching your head trying to figure out what happened. Point being, investing isn’t for sissies and it isn’t for quitters. The faster you figure this out the better you’ll be and the less pain and stress the ups and downs of the market will cause you.
Tip 2) You need a plan and you need to stick to it. The simple, undeniable truth is that short-term traders absolutely love trends. They enjoy it immensely when the masses, like lemmings to a cliff, grab a hold of the latest ‘best thing’ that they’re told absolutely can’t fail. Whether it’s a new ‘hot’ sector, a macro play that appears at 1st glance to make a lot of sense or the newest market flavor of the day these traders look forward to trends like a fat guy looks forward to a 7-course dinner.
The reason that they love trends so much is that beginner investors will jump on the bandwagon and push them higher and higher, even though they (the traders) don’t intend to hold on to them any longer than the trend lasts. As soon as they see that a trend has burned itself out they bail and leave you (the investor) holding onto something that has little or no long-term value. If you have a plan however you won’t be vulnerable to these vultures, pure and simple.
Tip 3) Compounding is your best friend. In fact, it’s the single greatest force for positive results in investing. A carefully planned portfolio protects your downside and assures that your money will keep growing while also absorbing temporary declines in any one single asset (or even several) that you have. The truth is that active traders need to be right almost all the time and, if they’re not, they’re done. On the other hand, if you leave your money alone and let it grow your investments will continue to perform year after year. Of the 2 options the latter is, in our opinion, much better.