How to achieve success in investing? Is it necessary to regularly obtain new information on developments on financial markets and continuous education? This may be essential for active investing, but even then, it does not guarantee certain success. However, if we invest passively, we do not have to focus only on analyzing charts and statistics. All you need to do is follow a few easy-to-learn basic rules.
Build a reserve
At the beginning, every investor should be aware of the reasons why it is worth investing. If a potential investor already knows what motivates him, he should start by creating a reserve (also often called a financial cushion) and not by investing all the free funds. There are unforeseen situations when we will need money immediately. If we invest all our spare funds and the investment is in the red, due to market fluctuations, cashing in on an investment that is at a loss can turn out to be an unpleasant experience. Not only would the investor lose some of his money, but he could also be discouraged from investing at all.
Building a financial cushion is therefore the first rule of investing. How big should this reserve be? It depends on many factors, in general it is recommended that it is at least as much as our 3 monthly salary.
Invest only free funds – no leverage
If we already have a reserve, nothing stands in the way of starting to multiply our savings and become a real investor. Here you should stick to the most important of the rules.
In the past, it has happened many times that the temptation to make a quick profit led investors to invest borrowed money. In other words, they invested on leverage, borrowed money from a friend or from a bank, the principle is the same. Invest only free funds, using leverage is very risky. This should rather be left to professional investors, who, even despite their professional knowledge, expose themselves to the risk of falling into debt. In bull market times, an investor may see higher returns due to the borrowed capital generating a higher rate of return, but when bears take control of the markets, things are often not so rosy. Therefore, always make sure to have a financial reserve and invest only your own money.
Diversification
Diversification is one of the basic principles of successful investing. Often, the concept of diversification is compared to not carrying all your eggs in one basket, because if something happens to it, you would lose them all. The same is true of investments. If you invest everything in one company, then the fate of your investment will be completely tied to it, for better or for worse. So if such a company fails, you will lose what you invested in it, and there are many reasons why a company could fail. For example, new technology will appear, management will make a bad decision, or competition will turn out to be stronger.
However, what is the chance that dozens or hundreds of companies will fail soon after each other? Much lower. This is why every investor should diversify their portfolio by placing many different companies in it. Diversification is now easier than ever, thanks to passive investing, represented by ETFs that track the development of an underlying asset (e.g. an index). Thus, when investing in ETFs, you indirectly buy the same companies that are part of the selected index, i.e. represent the selected market.
However, diversification does not have to end there, as the portfolio can be expanded to include other asset classes such as bonds, gold, etc. It is precisely in order to make a diversified Portfolio available to a wide range of customers that the Port’s investment platform was created, which customers no longer have to worry about diversification.
Invest for the long term
As we mentioned above, financial markets fluctuate, and fluctuations can cause investments to remain in a loss for a period of time. Such fluctuations can cause a lot of stress for a trader, but if they are investing for the long term, falling market should not be something to worry about. In the past, the markets, and with them investors, have gone through many difficult periods. It is worth mentioning two world wars, the period of stagflation in the 70s, the dotcom bubble, the financial crisis, or the recent lockdowns. Each time, people focused on spinning dark scenarios, but in the end, there was always a light at the end of the tunnel, the markets recovered and continued to rise. Long-term investing is one of the foundations of how to effectively increase the value of your money.
Be disciplined
However, falling markets can make people feel scared and want to abandon their investment strategy or even stop investing. However, this may turn out to be the worst decision an investor can make at such a moment. In such a difficult situation, another rule comes to the rescue, which says that markets grow in the long term. It is important to realize that the bear market will end sooner or later, and the markets will continue to grow. Some investors start to panic during a downturn, interfere with their portfolio, change its composition, etc. This is usually not a good idea. The history of financial markets teaches us that unexpected interventions in an investment strategy almost always have negative effects. So, investors should learn to be disciplined in every situation. Remember that the investment goal is to be met only after a specific investment horizon has passed, what’s more, a wise investor in such a situation should take advantage of the discount on the markets and buy more, but we write about this later.
Forget about ideal times to buy and sell – invest regularly
Another principle is also related to discipline. If you’ve ever heard “bombastic” statements like that Bitcoin’s price will rise to $1 million by 2022, or that the price of gold will double by the end of the year, it’s best to ignore them. Similarly, it is pointless to wonder whether the markets will rise or fall in the next month.
Why? The behavior of financial markets is determined by the behavior of millions of independent entities. No one can predict it, not even Warren Buffett. The best investors try to adapt their portfolios to different market conditions, but they are not the ones who manage the timing of when a trend change occurs, as they do not know when a recovery or decline will occur. So, the best, time-tested strategy is to invest regularly.
Take advantage of market downturns
Just because an investor is disciplined, doesn’t play with market timing, invests regularly and for the long term, doesn’t mean they shouldn’t take advantage of the opportunities that the financial markets offer from time to time. Such gifts are market declines, during which investment assets can be purchased “at a discount”. More experienced investors welcome the opportunity to use downturns to their advantage. The principle of increased buying during a bull market is also one of the most famous pieces of advice from W. Buffett. “Be afraid when others are greedy, and be greedy when others are afraid.”