Investing is the act of investing (money) into certificates of deposits, bonds, shares, property, or a commercial venture with the expectation of achieving a profit. Knowing how to invest successfully is the dream of many because it can lead you to financial independence and early retirement.
Acquiring the basic knowledge on how to invest isn’t that hard, and can avoid potential disasters.
Today let’s delve into what lessons investors should know by heart.
1) Never buy anything you don’t understand.
Countless times have I seen people investing in things without understanding what the hell they are doing. Even in the last months, we saw this with bitcoin. I’m not even going into the discussion about the merits of digital coins. But if you don’t understand something, don’t go and invest it all just because everyone is doing. Hypes and Ponzi schemes live and breath on the ignorance of investors (a lot of them). And when they die – and they always do – the only thing left is a massive transfer of money from a lot of investors to a small hand of dishonest individuals. Please don’t fall for that. Invest in things that you do understand.
2) Learn from history.
The first thing an investor forgets, especially when you see the value of your stocks consistently going up, is history. A bull market can lead to complacency. Then unexpectedly you see a crash. Investors panic, and sell in the worst possible time.
Four of the worst bear markets in US history:
- The crash of 1929, which eventually ushered in the Great Depression,
- Oil Embargo of 1973, which was followed by a vicious bout of stagflation,
- 2000 Tech Bubble bust and,
- Financial Crisis following the nominal all-time high in 2007.
Bear markets should teach us at least two basic things:
- They do happen from time to time, so prepare yourself, especially when things are great;
- After they start and while they last, you can see them as buying opportunities. Once in a lifetime buying opportunities. Make use of them.
3) More returns, more risk.
If you look at the last 3 years, investing 100% in stocks (SPY for example) lead to a 33.4% return (with a 13.1% volatility.) On the other hand, if you added 40% bonds (AGG) to a 60% stocks (SPY) allocation, you would have a return of 21.4% (with a volatility of 7.9%).
This means that if you want more return, you will have to inevitably take more risk. It’s absolutely key that you understand this because countless investors invest in “miracle” strategies that promises great returns without any risk. Usually, this type of strategies leads to disaster.
Following these basic rules will definitely contribute to avoiding financial disasters. It’s simple but easy to forget, especially in bull markets, when everything is going up regardless of your strategy. Eventually, volatility returns, as it always does. So take note and don’t forget them.
And you reader, do you have any additional rules to avoid financial disaster? What’s your strategy to stay the course?
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