THE 10 GOLDEN RULES
OF INVESTING

Following key rules to help create an investment plan can help you maximize returns while minimizing your risk. They can also help you to determine your risk tolerance, diversify your portfolio, and set a long-term approach for your investment strategy.

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When you start investing, it can be hard to know if you’re doing it right. But there are some basic rules and guidelines to follow to achieve your financial goals. Consider following these 10 golden rules to create a foundation as you build your own personal investing plan. 

Make a plan

The first rule of investing is to create a solid strategy that aligns with your financial goals and risk tolerance. A common error beginner investors make is not crafting a clear plan before jumping into the market. 

Next, consider your risk tolerance.

Once you have these factors in mind, research the best allocation and assets to reach your goals and diversify your portfolio.

By setting clear goals and regularly reviewing and adjusting your strategy, you can maintain discipline, make more rational decisions, and react better to any surprises that come your way. Remember, investing is a marathon, not a sprint. 

Invest only what you could lose

Investing can reap great benefits, but there is always risk involved whether you’re investing in stocks or crypto assets. You never know what could happen in the market, so it’s important to protect your financial well-being and invest only what you feel comfortable losing. 

That means building a solid savings or emergency fund before putting your money into the stock market — you should aim to have between three and six months’ worth of savings in a highly liquid low-risk savings account or a high-yield savings account. 

You should also stick to an investment strategy and avoid making financial decisions on a whim. That way, you can avoid accumulating credit card debts to cover daily expenses. 

Also, you should always be realistic about your potential yield or returns. By following this rule, you can invest more confidently, knowing that you have set yourself up for success.

Diversification

Risk will also be a part of investing, but the key to minimizing that risk is through diversification, or avoiding putting all of your investing eggs in one basket. 

By spreading your investments across various industries, sectors, and asset classes, you’re lessening the likelihood of any one particular event having a major impact on your portfolio.

If an investor puts a majority of their money into a single company or investment, their entire portfolio may face steep losses if the company performs poorly. Even if the asset has a promising future, external factors such as market conditions and industry trends can impact its performance.

Diversifying can provide a sense of security, better prepare you for market volatility, and help you reach your financial goals. It also allows you to take advantage of different industries and markets.

Make interest work for you 

When you invest in a digital asset or financial instrument, you can potentially earn profits or interest. While taking profits after every investment could be a good approach, some investors compound their yields by re-investing profits from previous investments into new ones. 

In other words, the first interest can potentially make even bigger ones if compounded. So, if you are looking for your money to grow over time, you can keep recycling your money around various investments and put your interest to work. 

A good approach is to invest regularly and consistently — even small amounts could make a big difference over time. However, there are no guarantees that a re-invested profit will successfully yield bigger returns. 

Avoid trends and stay the course

With many crypto projects using social media to gain popularity and attract investors, it’s possible to invest based on the fear of missing out (FOMO) or large promises. However it is important to consider that these trends fizzle out just as quickly as they appeared.

When you make such an uninformed investment decision, it is called herding. 

For example, some may invest in a meme stock based on its social media hype instead of doing proper research. 

Focus on long-term investments that have proven track records, and avoid investing based on rumors, speculation, or your coworker’s Tweets. By sticking to this rule, you’re more likely to see steady and sustainable growth in your portfolio over time.

Buy low, sell high

The age-old rule “buy low, sell high” still holds true — the goal is to purchase assets at a lower price and sell them for a higher price. 

While it may seem simple, implementing this strategy requires discipline, patience, and solid knowledge of market trends. Many investors make emotional decisions and panic when the market fluctuates, causing them to buy high and sell low. 

One aspect of this is the idea of loss aversion, where we feel the pain of losses more powerfully than the pleasure of gains. As a result, we are more likely to avoid taking risks that could lead to losses, even if the potential gains outweigh them. 

It’s often impossible to buy or sell at the perfect price, but doing proper research and aligning your decisions with your goals can help you.

Let behavioral finance principles guide your decisions 

Every investor will be affected by their emotions when investing at some point. Around two-thirds of investors regret impulsive or emotionally charged investment decisions. Making sound financial decisions is critical to achieving long-term wealth and success.

Behavioral finance recognizes that people are prone to cognitive biases and emotional influences that can lead them astray from rational decision-making.

Letting behavioral finance guide your decision-making can help you better understand the drivers of your investment habits and make better financial choices. 

One way to do this is by understanding how much risk you’re willing to take on with your investments. You can learn your risk tolerance and capacity for risk using features such as eToro’s advanced tools and risk scores.

Certain investors are unable to handle the market’s volatility and the ups and downs associated with more risky transactions. Other investors may need stable, consistent interest income. Knowing your risk tolerance can help you build a portfolio that reduces the amount of emotion you’ll experience when making investing decisions. 

Long term investments

Investing in the stock market can be a rollercoaster ride with its ups and downs. Many investors navigate this by riding it out and playing the long game.  

Avoid market timing, which adopts a short-term thinking on what should be a long-term view. It’s very difficult to accurately time the market and make a consistent profit. 

Holding onto your investments and weathering the turbulence could increase your chances of significant returns.

There are times when stock prices decline and your portfolio value decreases, like in a bear market. But, over a long period, the market may likely rise. The S&P 500, for example, has an average annual return of 9.82%.

Concentrate on a strategy that may provide long-term returns and allow your assets time to mature. Investing for the short term may not provide you with enough time for your money to grow. 

Evaluate your strategy regularly 

Sometimes, a major news or event can turn the market around. Therefore, it’s crucial to adapt to the market as it changes. While it’s important not to react to everything, it is important to review your portfolio regularly to make sure you’re moving towards your goals. 

This means taking the time to evaluate your current portfolio, assess your goals, and make any necessary adjustments to ensure you’re on track. 

Over time, your initial portfolio allocation may become unbalanced, as some assets will gain value and others will lose value as the market goes through ups and downs. If left unchecked, this can lead to a higher risk than you intended. 

Rebalancing involves adjusting your asset allocation back to its original targets to ensure you maintain your desired level of risk exposure. By rebalancing, you’re ensuring that your portfolio stays on track with your investment goals. 

Stay up to date with investing news 

Keeping track of the latest trends, companies, and investment strategies could make a difference in your portfolio’s performance. That’s because you can leverage the information and make investment choices accordingly. 

For instance, if tech stocks are the hottest on the market, you can invest in a few and potentially earn short-term gains based on that knowledge. If a company is also going bankrupt, you can quickly sell off its stocks and protect your portfolio from significant losses. 

Overall, it’s essential to stay informed about any changes that could impact your investments. By reading financial news and staying current with the latest investment trends, you can make more informed decisions and potentially increase your returns.

Final Thoughts

Following the ten golden rules of investing will put you in the best possible position to manage the inevitable ups and downs of the market. They will help you develop a plan that suits your personal situation and show you the benefit of revisiting and adapting your plan in the future.

This should also help you to evaluate how you will achieve your personal version of financial freedom.

Visit the eToro Academy to learn more about the techniques you can use to keep your investment decision-making on track.

FAQs

Which is the most important rule for investing?

The ten golden rules of investing aim to keep investors focused on higher-level factors that can make a difference to their investment returns, rather than worrying about potentially inconsequential factors that won’t. 

They ideally work in conjunction with each other, but establishing your aims and investments is perhaps the most important rule and should form the foundation of any investment plan.

When should I rebalance my portfolio?

Portfolio rebalancing involves adjusting asset allocations by selling existing positions and buying new ones. It can be done at any time, as long as the relevant markets are open. Rebalancing a portfolio helps to adjust its risk profile and should be done following changes in market conditions.

How can I measure how much risk is in my portfolio?

Measuring portfolio risk can be a highly technical operation involving complicated statistics. Measuring risk involves understanding which investment returns vary over time. 

If your profit/loss reading is moving dramatically, or to an extent that makes you uncomfortable, you should consider rebalancing your portfolio.