Investing for most people can seem confusing and complicated, the financial industry ensures that it remains so for their benefit. Most people rely on financial advisers or mutual funds sales representatives to handle their investing needs, they of course benefit from this and would like to keep their clients confused and in the dark. Mike @ The Oblivious Investor recently discussed how the industry benefits from investors confusion. However investing does not have to be complicated, investing can be simple if you just follow a few rules.
1. Have an Investment Policy Statement
We have discussed the importance of having a written investment policy statement. An IPS will be your guide to investing and will keep your emotions out of investing.
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2. Proper Asset Allocation (Mix of bonds, stocks and Cash) and Diversification
According to studies asset allocation accounts for about 90% of your portfolio volatility, ensure you have the proper asset allocation for your risk tolerance and diversify across different asset classes.
3. Buy Low Cost Index funds or ETFs
Investors can get confused by all the various investment vehicles available, the most common and widely used vehicles are Mutual Funds, however these can be expensive for investors. Best strategy is to purchase low cost index funds and exchange traded funds (ETFs).
4. Ignore the Noise
Everyday analysts and economists make predictions, estimates and give their view on how things will go, the media covers these reports extensively. The problem is that more often than not these reports are contradictory and confusing to the investors. Conclusion: Just ignore the noise.
5. Know What You Invest In
When it comes to investing best advice is to invest in things you know. If you do not understand the investment stay away from it. Performance chasing is always a dangerous strategy since most professionals can not beat the chances are you won’t either.
6. Contribute Regularly
Contributing on regular bases to your portfolio is a great way to build wealth. Often it can be hard to make large lump sum contributions, dollar cost averaging is a great strategy. Just take a small portion of your pay check on regular bases and contribute it to your investment plan.
7. Review Regularly
Markets are volatile, they are up one day and down another day. These market movements will cause your asset allocation to shift, so you need to review your portfolio on regular bases to ensure you rebalance things. Do not overdo it, annual reviews are perfectly fine.
8. Make changes as needed
Things change; you grow older and closer to retirement, you will have children, get a raise/promotion etc. Your portfolio should not be static and needs to change as your circumstances change. Make changes as needed.
9. Avoid“Exotic” investment opportunities
There are many “exotic” investments available but these have not been time tested and can blow up any day, these exotic investments were the main cause of the recent financial collapse. Keep things simple with stocks, bonds, ETFs, index funds and Mutual Funds there are ample opportunities in these.
10. Ignore Market Ups &Downs
As stated earlier; markets are volatile and will have its swings the best thing is to ignore them. Nobody can predict what will happen in the short term, but history has taught us that over the long term markets move upwards.
Investing can be very simple if you follow these rules; however the industry and media try to create the illusion that investing and wealth creation is complicated and requires professional help.
Any tips you would like to add?