Investing Principles Only Rich People Know – Warren Buffet once said, you only find out who is swimming naked when the tide goes out. What the investing guru meant by this is, that it is only during a weak economic environment that the real investors succeed. When the environment is good, it’s easy to neglect all caution. During this time, almost all investment options do well and investors take home positive returns.
However, during an economic turmoil, is when investors really see the need of applying the core principles of investing. These principles are so important but only a few elites know about them. And never has it been a better time to learn how to invest than now.
Several parts of the economy have been tanking with after-effects of the pandemic and uncertainty due to a possible world war, but still, some rich people have made more money than ever. And how did they do it? Today, we are going to share with you ten principles that will get you investing like the rich.
15 Investing Principles Only Rich People Know
1. Have A Personal Financial Roadmap
The very first principle is to understand your financial situation in totality. This is especially important if you have never created a financial plan before. You need to evaluate your current financial position, determine your risk tolerance and establish your goals. Whether you are doing this with a professional or by yourself, this is the initial step that you have to start from. As you do this, there’s one very important aspect that you always must keep in mind, which is honesty. As cliché as that sounds, you need to be as transparent as you can, the truth is it is not guaranteed that you will make the money back, but if you get your roadmap well-drafted then chances are, you’ll make money.
2. Invest Early
It has been proven that investing early is more effective than waiting to have a lump sum to invest with. Start with what you have and slowly build your portfolio. By investing early, you will take advantage of the power of compounding. If you didn’t know, compounding is simply using up the money you have earned, to make more money. So, you will not only earn from what you have invested but that accumulated capital gains interest and dividends that you have earned. A two-year difference in investing could translate into thousands of dollars potentially lost.
The art of diversification is what most wealth managers and successful investors have mastered. Never putting all your eggs in one basket, is a good principle to follow. While that may seem like common sense, you’ll be surprised at how common sense isn’t common when it comes to investing. Diversification is actually quite simple. It means you pick a couple of investments instead of just one. By having a group of investments, you lower the risk.
Look at this scenario, if you invest in one company, then the company goes bankrupt, depending on your share type, you stand to lose a lot of money. As you diversify, ensure you select a wide scope of investments. Different asset categories throughout history have never moved up and down at the same time. This means when stocks go down, chances are bonds are still up or have gone down but never at the same exact rate. But by having a portfolio, you are guaranteed that your losses are limited.
4. Leverage Is Key In Building Wealth
Get leverage to build substantial wealth. You are only limited to what you have and if you want to build massive wealth, you will have to seek some leverage. Leverage comes in multiple forms. Financial leverage is the use of other people’s finances to increase the pool of available funds to build more wealth. Time leverage is the consumption of other people’s available time since you only have 24 hours in a day, but in actual fact, it’s more like about sixteen since the rest you’re probably asleep.
Knowledge leverage is the use of other people’s expertise since you don’t know everything, and someone out there knows more about investing than you do. Systems and technology leverage refers to the use of other people’s established systems that are more effective and efficient.
5. Be Vigilant Of Fraud
There are fraudsters everywhere, and scam artists are always looking for their next target – Don’t be one. Most of the time, these fraudsters use highly publicized news items to lure investors. The opportunity they provide is often too good to be true. To avoid falling victim to such, ask as many questions and request official documents. Also, involve a lawyer to evaluate entities before investing.
6. Cash Is The King
If anything, the pandemic has really shown us the importance of a cash reserve. Before making any financial plan, ensure you have a cash reserve. The reserve should be between three to six months’ worth of expenses. Start by listing down your list of expenses and the amounts, so you know exactly how much you spend every month. The people that had reserves when the pandemic first hit were probably not so affected by the economic turmoil. The reserves enabled them to sail through the turbulent waters completely untouched. We have no control over economic changes, but we do have control over our emergency funds. Ensure you have the cash stacked somewhere safe just in case of any unprecedented change.
7. Deadly Debt
Advisors point out that debt is both good and bad. Well, it has both positives and negatives. Debt is great when you’re using the money for investing and not to cover expenses. In fact, most high-net-worth individuals increase their money through debt. But, the reality is the people in the best financial shape are those who are completely debt-free.
Even sophisticated investors and businessmen get into trouble if their debt loads aren’t well-monitored. By taking debt you are obligated to constantly make the repayments according to the agreements and ensure you meet all timelines. Anything could happen which could hinder your ability to make the repayments in a timely manner. We are not entirely against debt, if you have to, take it, but only for investment purposes and not to cover personal expenses.
Also, if you really have to take on debt, create a plan to get rid of it as soon as possible. It’s not always guaranteed that your income streams will sustain loan repayments.
A great example is the Russia – Ukraine war, citizens within those regions who have debt are still obligated to complete their repayments regardless of the current situation. Despite most of them losing jobs and migrating to other regions they still have to pay their loans.
8. Timeframe is Key
It is important to understand your time horizon before building an investment portfolio. By understanding this, you are able to keep turbulent market conditions in perspective. For example, a long-term investor is not afraid of the bear market. In fact, it provides a great opportunity to trade at discounted rates and make good returns after a given period of time. See how understanding your time limits help you draft a great investment plan. It is very irresponsible to build a portfolio without establishing when you will need the money.
9. Dollar-Cost Averaging
This refers to the process of periodically adding cash into investments at specified intervals. This could be once a month or a week based on your ability. Some people are emotional about sports, others about politics, the climate, and so on. So, it’s only reasonable to be emotional about your investments. However, the truth is, that emotionally-based decisions almost never work well in the world of investing. However, setting up an automated investment plan in your accounts eliminates emotions from the whole process, it reduces the desire to time markets, and enables one to build wealth gradually over time.
10. Rebalance To Make Money
Rebalancing is based on the theory, ‘buy low and sell high’. It involves adjusting the weights of the assets within a portfolio to take advantage of the changes. This practice allows you to sell positions that increased in value and simultaneously buy the positions that went down. This enables maintenance of the original asset allocation in line with the portfolio holder’s risk tolerance.
11. Conservative Bonds Are A Safe Haven
When the markets are soaring, many investors don’t pay attention to quality fixed income sources. Everyone is rushing to get the high soaring technology stocks. And, it’s ok, there’s nothing wrong with that. But the reality is most of the time when the market is doing really well, turbulence often comes in. Yes, you will make some returns but for how long before there’s a downturn. Here is where bonds come in. Bonds serve a crucial purpose in portfolios. They provide a cushion for turbulent markets by allowing investors to withdraw from an asset that didn’t plummet in value. And dismissing bonds as a core investment strategy is being short-sighted.
12. Returns And Risk Go Hand In Hand
Every investor out there is thoroughly searching for that highest return option with the least risk. Finding the balance is the hard part since the higher the returns promised, the higher the risk of losing the investment. The risk could come in many ways. It could be illiquidity, poor credit, or leverage. Illiquidity refers to the inability to convert an asset into cash fast. Economic conditions are also very turbulent and play one of the key roles in determining the amount of return. So as you invest, always keep an eye open, every lucrative opportunity has a high level of risk.
13. Boring Always Beats Exciting
Human beings love exciting things, they tend to go for the next best thing in the market. However, there’s a thin line between an exciting opportunity and a viable opportunity. And most people don’t see it. You will find most investors confuse with an exciting idea for a good investment option. This excitement is often packaged in the latest fad, a new business model that will change the way of doing business, the latest technology, or even an exclusive deal.
Instead of focusing on the fundamentals, most focus on the hype. Remember what we said earlier about mixing emotions with investment decisions, I hope you now understand the point better. To avoid being lured like a child with candy, stick to the boring typical investments. These could be index funds, blue-chip stocks, or even high-grade bonds. You might miss out on the next hot IPO, but you definitely won’t miss out on stable returns.
14. Keep An Eye On Fees And Taxes
Brokers charge fees on every trade made. The average is between 2 – 5% in fees for every sell or buys transaction. The commissions between brokers vary, so ensure you evaluate them before making your decision. Also, tax on capital gains can reduce your overall returns. Before investing evaluate the regulations within your jurisdiction to find out what taxes are due on your gains.
15. Move On From The Stock Markets Once You Win
The stock market is addictive. Many people like to compare it with gambling. Once you make some good money, you will always want to make more. However, once you have made a significant amount of money from the stock market, it’s a good idea to exit to avoid severe market downturns and the stress that comes with waiting out through bear markets. You see, you can always seek other investment opportunities, with stable returns despite them not being as lucrative in returns as the stock market.