5 GOLDEN RULES
OF INVESTING

There’s a lot to learn when you start investing, but bearing some of the core principles in mind will hopefully help you to become a better investor. Follow these rules for investing to avoid beginner investment mistakes.

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Before investing, remember to ask “Why?”, “What?” and “How?” Each of those questions is linked to the five foundational rules of investing, which, if followed, offer the potential for you to put yourself in the best position to avoid common investment mistakes.

Rule 1: Know Your Aims and Investments

From the time before starting investing, to when you are carrying out ongoing portfolio management, it is crucial to remain aware of your overall aims and establish the knowledge base needed to select investments which will help you achieve them.

Aims, timeframe and risk toleranceshape what ‘fits’. Defining these inputs helps investors compare assets in terms of expected volatilitypotential return and investment time horizon.

Establishing “why” you want to invest should also teach you what rate of return you’re aiming for, as well as the length of time you want to invest for.

Those two factors are a crucial part of the investment process, and raise the following question: “what” assets should you invest in to achieve your goal? 

The asset selection element of the decision making process will be influenced by your investment time horizon which considers how the maturity dates of different assets might align with your timescale and objectives.

Case Study: Higher risk-return

• An investor wants to implement an aggressive investment strategy that aims to make a high return of 30% in two years.
• This involves investing in assets and strategies with greater risk return.
• Greater risk return increases the chance of a higher loss of capital. 

Understanding your risk tolerance helps determine whether growth stocks, bonds, or a balanced approach better suits your circumstances.

Case Study: Lower risk-return

• An investor with a 20-year time horizon is prepared to accept short-term volatility.
• The longer timeframe allows more opportunity to adopt a buy-and-hold approach and for their portfolio to recover from market downturns.
• The investor can still consider including higher risk assets in their portfolio. As long as the expected date of them maturing fits in with the investor’s investment timeline.

These examples are simplified and for illustrative purposes only; actual liability depends on personal circumstances and local laws.

Rule 2: Plan

A plan can develop consistency by reducing emotion-led changes when markets rise or fall and forms part of developing skills to become a better investor. Plans need to be tailored to each individuals requirements and approach, but could include:

• Aims: A record of your objectives.
• Allocation: What assets to buy and when you plan to buy them.
• Evaluation: How your portfolio’s performance and risk profile will be measured and reviewed.
• Risk: Risk parameters and maximum exposure limits.
• Adaptability: Tolerance ranges outlining how your trading approach may be adjusted in different market conditions.
• Strategy integrity: The criteria to be met for there to be changes made to your overall strategy.
• Structure: The timeline for ongoing reviews.

Asset allocation

Asset allocation is the process of deciding which markets and assets to invest in and forms a key part of any investment plan. This part of your investment plan needs to be given considerable thought, because every time you convert cash into an investment position, you’ll increase the risk level of your portfolio.

Rule 3: Diversify

Diversification spreads exposure across assets, sectors or regions so any single outcome has less influence on overall results. It is often considered alongside asset allocation and risk management.

There are three main factors to consider when planning your approach to diversification:

• Asset class: Using a mix of instruments such as bonds, equities, currencies, commodities and potentially crypto.
• Industries and sectors:  You may have a mix of bonds and stocks, but if all those investments are related to healthcare firms, you will be exposed to one sector.
• Geographic locations: Spreading capital across assets which are listed in, or operate in, a variety of regions across the world.

This approach mitigates against the risk of a financial shock to one asset class, sector, or country, having a considerable impact on your overall performance. If one of your investments doesn’t do so well, you still have other investments that may perform better and hopefully compensate for the loss.

Case study: Hidden concentration

An US investor with $10,000 to invest allocates 40% of their capital to stocks, and splits that capital four ways. They buy:

• $1,000 of the S&P 500 Index which is a fund holding the 500 largest US listed firms.
• $1,000 of iShares MSCI Taiwan ETF (EWT) to gain exposure to a non-US market.
• $1,000 of State Street Technology Select Sector SPDR ETF (XLK). 
• $1,000 of NVIDIA (NVDA) stocks, aiming to tap into potential growth in the AI sector.

These examples are simplified and for illustrative purposes only; actual liability depends on personal circumstances and local laws.

In terms of meeting diversification targets, they have bought three different types of instruments, Exchange Traded Funds (ETFs), indices, and stocks, and they have also gained some exposure to different international markets. 

But because of NVIDIA’s significant market capitalisation that stock makes up a considerable percentage of the S&P 500 Index, and the State Street Tech ETF. The real exposure to NVDA stock is greater than $1,000.

The position in the Taiwan ETF while offering geographical diversification represents further sector concentration risk due to the semiconductor industry which NVIDIA operates in being heavily reliant on that country.

Rule 4: Prepare 

Preparation means expecting volatility and thinking in advance about how drawdowns and news may affect decision-making. Clear rules which anticipate future events can reduce reactive changes to a situation.

Markets are volatile. Things change, and having previously thought out rules helps investors maintain perspective during market movements. Those rules should consider:

• What might be considered normal market movements for the assets which are invested in.
• The investor’s own investment time horizon and whether they can ride out short-term turbulence.
• Setting expectations for potential drawdowns.
• Accepting not all positions will be profitable.
• Potential to use stop-losses.
• Establishing criteria for portfolio reviews (not panic reactions).

Rule 5: Never Stop Learning

Ongoing learning helps investors understand products, costs, risks and common behavioural mistakes, and supports periodic review of outcomes.

“The first rule of an investment is don’t lose [money]. And the second rule of an investment is don’t forget the first rule.”

Warren Buffet

Never stop learning. Investing benefits from constant learning, so make sure you access updated knowledge along the way. Sources and approaches to consider include:

• New investment products and their features.
• Changes in market structure or regulations.
• Common behavioural biases that affect decisions.
• Portfolio rebalancing techniques.

Educational resources help investors adapt their approach as markets evolve. Regular learning supports better understanding of new concepts and helps identify when portfolio adjustments may be warranted.

As well as learning new things, there is also benefit in regularly recounting the five golden rules and their intended purposes, as outlined in the table below.

Rule	Core idea	Related concept
Know your aims	Objective + timeframe + risk tolerance	Time horizon, risk appetite
Plan	Documented approach + review	Behaviour, discipline
Diversify	Spread exposure	Asset allocation
Prepare	Expect volatility + avoid reactive changes	Drawdowns, corrections
Keep learning	Knowledge + review outcomes	Costs, product features

Final thoughts

The five golden rules provide a higher level framework for consistent decision-making that adapts to changing markets while maintaining focus on long-term objectives.

They will help you to 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.

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Quiz

FAQs

What’s the difference between diversification and asset allocation?

Asset allocation refers to how a portfolio is divided among different asset classes (stocks, bonds, commodities). Diversification goes further by spreading investments within those asset classes across different sectors, companies, and regions. Both work together to manage portfolio risk.

What does “risk tolerance” mean in practice?

Risk tolerance describes how much portfolio value fluctuation an investor can accept without changing their strategy. It combines financial capacity (ability to absorb losses) with psychological comfort (ability to stay calm during declines). Risk tolerance typically decreases as investment timeframes shorten.

What is a market correction?

A market correction commonly refers to a 10-20% decline from a recent market peak. Corrections occur regularly in market cycles and differ from bear markets which involve declines greater than 20%. Historical data shows major stock indices experience corrections approximately once per year on average.

How often should investors review their portfolio?

Review frequency depends on individual circumstances and market conditions. Many investors conduct quarterly reviews to assess performance against objectives. More frequent monitoring may lead to overtrading, while less frequent reviews might miss important changes requiring attention.

Why is a written investment plan important?

A written plan provides objective reference points during emotional market moments. It documents initial assumptions, investment objectives, and decision-making criteria, helping investors avoid reactive changes based on short-term market movements. Such plans also facilitate consistent review processes.