Managing Money Yourself
There is a
simple decision that every
investor must make at some
point. The decision is
whether or not to manage their
own investments or let somebody
do it for them. Whatever
decision you make on this it is
helpful to know some of the
basic investment principles that
help mitigate your risk and
maximize your return.
Investing can be considered risky in any short-term view of the market. However, with a long term view the picture changes quite considerably. Thus, one of the first principles to understand is that time is always on your side. The longer you can stay invested
in a diversified portfolio, the better off you will
likely be. This applies to
almost any market scenario.
Considering even the Great
Depression and the Bear Market
in that period, the average
investor would have been better
off leaving his or her money
invested as long as he could
leave it invested over the
entire course of the downturn.
Therefore, investment principle number one is the following:
#1 – Time is always on your side. This principle effectively says that you need to always be willing to leave your money in for a period of roughly 5 years
minimum for equity investments and 2 – 3 years for other types of investments. Five years is no hard and fast rule but an estimation of how long it takes for any short-term downturn to begin moving up once again.
The next
subject most people devote
inordinate amounts of time to is
selecting the actual
investments. This is
a worthy subject considering the
vast variance you find in
different financial investments.
However, if you look at the
statistical records you will
find that even the most astute
and lauded investment manager
has failures or makes poor
choices on a somewhat regular
basis. Why is this the
case? It is because the
simple fact is none of us can
predict the future.
Regardless of how much we
prepare or research we are still
at the mercy of fate and an
unpredictable world.
Therefore, we need to accept
this is an important factor in
making investment decisions.
So what principles of investing can help us deal with the inherent unpredictability of the future? There are two that go far in mitigating against this risk. They are as follows:
#2 – Never put all your eggs in one basket. Because nobody can predict the future, we are always better off investing in a variety of investments that perform well under different market conditions. You simply should
divide your investments according to risk and asset class and invest accordingly. This ensures you don’t put all your eggs in one basket, which is the big mistake people are most likely to make. They hear a friend tell them about this “can’t miss” stock opportunity and then they invest all their money only to see it quickly dissolve into nothing.
#3 – Never invest all of your money at once. When you invest in anything dollar-cost-average instead of investing one lump sum. This is the rule that
helps you from paying too much for an investment. Sure, you may get a good deal and could be buying at an all time low but it is not likely. The odds are that the price will continue to fluctuate and thus it is usually better to dollar-cost average rather than invest all your money at once.
If you follow these simple rules you will keep yourself from making any big mistakes in managing your money yourself and just as with everything else time breeds knowledge so over time you will accumulate the knowledge necessary to go beyond these two simple rules.
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