10 fundamental principles every investor should adhere to
Investing in today’s global geopolitical economic climate can appear daunting due to the constant flood of market news, many investment options and continuously fluctuating market conditions. However, there exist several fundamental principles that every investor should adhere to.
These principles aim at building an effective long-term strategy to meet your financial aspirations.
LET’S CONSIDER 10 PRINCIPLES THAT EVERY INVESTOR SHOULD BE WELL-VERSED WITH:
1. PLANNING YOUR INVESTMENT GOALS
Establishing clear investment goals is crucial. It aids in maintaining focus and ensures you stay on course towards achieving your financial targets. A well- structured plan offers the confidence to stay committed. Factors such as age, investment timeframe and risk tolerance must be considered while setting these goals.
2. LONGEVITY FACTOR AND ENHANCED SAVING
Throughout our lives, we’ve may have seen instances where loved ones have faced financial hardships. These situations can be a powerful reminder that it’s never too late to make a positive change in your financial life by stepping into the world of investing. If you find yourself regretting that you didn’t start investing sooner, don’t let this hold you back. The best time to start is now. The key to successful investing isn’t necessarily about when you start, but rather about maintaining consistency and discipline once you do.
3. SUBTLE EROSION OF CASH DUE TO INFLATION
Though a preferred asset class, cash isn’t always the best option. Inflation can gradually diminish the purchasing power of your cash, making it less appealing over time. Considering inflation, cash generally falls behind other assets like stocks and bonds. This implies that, over time, cash will generally depreciate in terms of purchasing power.
4. BOOSTING WEALTH WITH COMPOUNDING
Often said to be the eighth wonder, compounding can significantly boost your wealth over time if you start investing early and reinvest your income. The power of compounding is immense, to the extent that even a few years’ delay in investing or opting not to reinvest income can drastically affect your final returns.
5. RISK AND RETURN – THE INSEPARABLE DUO
While the ultimate goal is to achieve the highest possible return with minimal risk, in reality, there is often a trade-off. Higher potential returns come with increased risk and vice versa. Thus, if you’re targeting higher returns, you must be prepared and capable of withstanding substantial fluctuations in your investment’s value.
6. EMBRACE MARKET VOLATILITY
Market volatility is a natural occurrence, so don’t let it unsettle you. Maintain your composure when others around you are succumbing to panic. Often, the most opportune time to invest is when others retreat in fear. So, resist the urge to panic when markets take a downturn. Instead, remain serene and committed to your long-term objectives.
7. RESIST THE URGE TO TIME THE MARKET
The age-old adage that ‘timing the stock market is a fool’s game’ rings true. It’s an incredibly challenging task. By staying invested, you ensure your participation in the long-term growth trajectory of the market, which helps cushion against volatility. Remaining invested in the market also positions you to seize opportunities as they present themselves. You’ll be ready to purchase when prices are depressed and sell when they peak.
8. DIVERSIFICATION IS A PROVEN STRATEGY
Spreading your capital across various investments can help mitigate risk and enhance your chances of success. Over time, different investments tend to balance out, with the objective of growing your wealth despite some investments underperforming due to market fluctuations.
9. REGULAR PORTFOLIO REVIEWS ARE ESSENTIAL
Regular reviews of your investment portfolio allow you to track your progress and ascertain whether your investments are performing as anticipated. This offers the opportunity to make necessary adjustments to your portfolio. Regular reviews aid in maintaining discipline and focus on your long-term goals.
10. EXERCISING CAUTION WITH INVESTMENTS
Promises of high returns with negligible risk are usually red flags – the investment world is rife with scams, with many unscrupulous individuals looking to exploit unsuspecting investors. Before investing, it’s prudent to consult with a financial professional to comprehend the risks involved.