There are risks involved in any investment, but by understanding what you are investing in, you are able to take calculated risks, and be able to manage the risks better.
In the world of investment, no risk means no return. People who wait too long to invest may not be able to achieve their financial goals and others who don’t understand investing may end up with portfolios that are losing money.
Whether you are a seasoned investor or just getting getting started on your investment journey, it is good to keep these timeless rules in mind.
1. Pay attention to the cost of investing
It is one of the few things in investment that is predictable and controllable. Every dollar paid in cost is a dollar less in potential profit. And it all adds up over the long term.
The obvious costs of investing include administration/processing fee, entry fee, transaction fee, brokerage, commission, stamp duty and taxes.
The less obvious ones are opportunity cost (what you give up for taking a specific action), personal flexibility (e.g. obligation to service your mortgage for the next 20 years), and stress (e.g. losing sleep over an investment).
2. You know less than you think
Avoid predicting the future. You will get it wrong more often than you think. Nobody has a crystal ball.
Yet, people do it all the time. Investment analysts/stock brokers compile lists of stocks with Buy/Sell recommendations based on their predictions of future company performance. Economists make calls on whether interest rates would rise or fall ahead of reserve bank meetings. Real estate agents produce charts showing the price paths of property prices for the next 20 years.
It’s ok to say “I don’t know”. Really.
Because the sooner you realise what you don’t know, the sooner you can direct your energy and effort to the things you do know.
3. Keep it simple and focus on the things that matter
There are a million ways to make a million dollars, and you don’t need to learn them all to be a millionaire. You just need to know a few really, really well.
The same goes for investing. Tens of thousands of different investment products and strategies exist, and more are being “invented” every day. Yet, only a few really matter. Focus on the things that matter, and understand them really, really well.