Investing Rules to Live By

31 May 2019 by National Bank
Investing rules

Online investing has come a long way. The ease of opening a brokerage account and transferring funds to invest as well as the tools and research available to them has certainly helped clients make that choice.  

Once ready to invest, some clients experience a condition called paralysis by analysis which can be defined as a state of overthinking a situation resulting in an inability to decide or take action. Keeping that in mind, here is a list of investing rules to follow to help you avoid that condition.

Have a plan

Successful investing requires you to have a plan with specific objectives and steps for reaching your financial goals. To help you, most financial institutions offer free retirement calculators that allow clients to work out different scenarios based on the number of years, the expected returns after inflation and the amounts added. Having that plan 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 how setting up your plan. Will you invest in 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

We’ve all heard the saying don’t put all your eggs in one basket. Well, it also applies to your investments. Many investors have felt the shock of seeing their portfolio drop by 10% or more in one day following negative news because they were concentrated in one security or in a specific sector. By spreading your portfolio across different investments, sectors, asset classes and geographic regions, you lower the overall portfolio risk and improve long-term returns. The use of ETFs and mutual funds can also help to diversify your portfolio. Another underappreciated benefit of diversification is the smoothing out of returns which lessens the emotional urge to sell when the markets are down.

Don’t speculate

Some investors succumb to the siren call of get rich quick and they speculate or just gamble with their brokerage account. That hot stock tip from your co-worker or family member often ends up being a losing proposition.

Consider long-term investing

Even the most successful investment gurus can’t choose the perfect time to buy or exit an investment. In many cases, the highest percentage daily market returns are preceded by very negative ones. Many people use the example of trying to catch a falling knife when trying to time the best purchase price. As an investor, you should aim to do the following: 

  • Invest regularly (dollar cost averaging): Setting up a systematic investment plan on a weekly, bi-weekly, or monthly basis lets you start investing right away by purchasing securities at different prices: sometimes at a higher one 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 (dividends or interest) are reinvested.
  • Rebalance at least yearly: As time passes, your portfolio mix will change because your various investments will increase or decrease at different rates. If nothing is done, you might eventually end up with a portfolio that is either too risky or too conservative. An annual rebalancing will reset your holdings to maintain the target asset allocation.

Increase your financial literacy

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 and to better understand the risks and rewards of the business, industry or region you wish to invest in. Another way is to learn more about the different types of accounts (TFSA, RRSP, RESP, margin) as well as investment products (stock, ETFs, options, etc.). A good starting point would be to sign up for seminars or webinars offered by your direct broker on various topics and to take advantage of the free research & tools available on their site.

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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