Investing Rules to Live By

09 April 2021 by National Bank
Investing rules

During the last few months, investors new and old have been overwhelmed with stock market related news.  From social media inspired wallstreetbets, to an unexpected rise in interest rates, a spike in oil prices and the continued effects of Covid-19 on our economy.  What’s an investor to do?  In times like these we should remind ourselves of the investing basics.  

Here is a list of investing rules to follow to help you be successful online investors:

Have a plan

Having a plan with specific goals will go a long way in determining your success at managing your investments. You need to determine your asset allocation (cash, fixed income and equities) and which investment products you will use: individual stocks, ETFs, options, mutual funds, bonds or a combination of all these. Once created, you can then move on to the next rule.

Diversify

By diversifying, you lower the overall portfolio risk and improve long-term returns. Another underappreciated benefit of diversification is the smoothing out of returns which lessens the emotional urge to sell when the markets are down. That’s why many investors will use ETFs or mutual funds to diversify their portfolios.

Don’t speculate

Some investors succumb to the siren call of get rich quick schemes, and the GameStop saga fuelled by social media posts is simply the latest in a long line of stocks that have left investors with big losses in their brokerage accounts. 

Consider long-term investing

Even the most successful investment gurus can’t time the market. In many cases, the highest percentage daily market returns are preceded by very negative ones. As an investor, you should aim to do the following: 

  • Invest regularly (dollar cost averaging): Setting up a systematic investment plan lets you start investing right away by purchasing securities at different prices: sometimes at a higher price when markets are going up and other times for less when they correct. The key is that you are averaging your unit cost over a long period.
  • Compound your returns: It is the process where the value of an investment increases over time because the earnings it generates are reinvested. For stock & ETF dividend investors this can be achieved by enrolling your securities into a dividend reinvestment plan (DRIP).  Instead of having the dividend being deposited into your cash balance the DRIP will allow you to purchase whole securities without paying a commission while the difference would be paid in cash.
  • Rebalance at least yearly: For buy & hold investors there is nothing harder than selling a portion of an investment that has significantly increased in value.  The reason you should is as time passes, your portfolio mix will change because your various investments will increase or decrease at different rates. If nothing is done, you will eventually end up with a portfolio that no longer reflects your asset allocation. An annual rebalancing will reset your holdings to maintain the target asset allocation.

Increase your financial knowledge

Never stop learning is certainly a mantra that successful financial professionals live by, and it should also apply to investors who wish to manage their own portfolios. Increasing your financial knowledge will go a long way to help you make informed decisions when doing research. A good starting point would be to sign up for our free webinars.

By taking the necessary time to research and apply these five investing rules, you can go a long way in creating an investment portfolio that can help you achieve your goals.

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