3 Time-Tested Investing Rules

Everyone wants to know the secret sauce when it comes to investing in the stock market. What is the next stock that is going to pop? What sector should I avoid? When is the next crashing coming? The problem with these questions is that no one really knows the answer. Sure, people, even the experts, will give you their best judgment on how things will play out, but at the end of the day, no one really knows what is going to happen in the stock market.

For this reason, you are best left to ignore trying to find the answers to these questions and instead focus on what we do know when it comes to investing. This post is going to show you the 3 things we know that will have a great impact on your success over the long-term when it comes to investing in the stock market.

1. Pay Attention To Fees

I can’t stress this enough – fees eat away at your return. Because of this, you have to make sure you are paying the lowest possible fees on your investments. Some reading this might think they don’t pay any fees since they don’t get billed for anything. But you would be wrong.

If you invest in mutual funds or exchange traded funds (ETFs) there are underlying management fees that you pay. You just never see them because they get taken out from the top. This means that if you are paying a 1% fee each year and in a given year your mutual fund earns 9%, you only earned 8%. The 1% you paid came off the top.

Now, how much does 1% really matter? If you have $50,000 you are paying a fee of $500 a year. If you hold that investment for 20 years, that comes to $10,000 you just paid in fees. As you can see, over time, they add up.

If you instead invest that $50,000 in a mutual fund that charges 0.25% in fees, in 20 years you paid $2,500 in fees. You now have $7,500 more in your investment account. (And in reality you would have even more when compounding is taken into account.

The bottom line is that fees matter and you better make sure you are paying a low amount when it comes to them.

2. Have A Plan

Another key rule for investing is to have a plan. If you don’t have a plan, how will you know where you are going? Odds are you won’t and your investments won’t perform as you had hoped.

Before you invest any money, take the time to sit down and create a plan. What are your goals? Why are you investing? The more detailed your plan is, the greater your odds of success when investing.

For example, when I was younger, I had no plan when investing my money. I was basically chasing the hot stocks at the moment. What happened? I lost my shirt. I lost over half my money. This was because I didn’t have a plan.

After that experience, I did what I am telling you here. I sat down and created a plan. I figured out what my goals were, how long I was investing for and what my investments would be. This has lead to me to experience great success investing.

The reason is simple: I no longer act on emotion. I don’t make rash decisions. Everything is planned out and outlined according to my plan and that helps me to be successful.

3. Educate Yourself

I’m not suggesting you go out and get a degree in finance or anything like that. All I ask is that you take some time and do some basic learning on how the stock market works. A great starting place is the book A Random Walk Down Wall Street by Burton Makiel. Reading this will teach you almost everything you need to know about the stock market and investing.

And that is all you need to know – the basics. Don’t bother with option strategies or head and shoulder charts, etc. It’s not worth your time. Just get a basic understanding of how things work and why.

The reason for this is simple: most investors fail because they allow their emotions to make decisions for them. We all know we usually make horrible decisions when emotional. By learning the basics of investing (along with having a plan) you can take a lot of the emotion out of investing and this will help you to be more successful.

Final Thoughts

There are the 3 investing rules that are time-tested. As you can see, they aren’t that complicated. You just have to educate yourself on the basics, have a plan and watch out for fees. If you can do these 3 things, you will be well on your way to investing success. This is because you will be working to keep your emotions in line and you can also keep more of your money so that it keeps working for you.

[Image Courtesy of OEC Online]

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