The 6 Rules of Stock Market Investing
Updated: Feb 13, 2020
Investing in the stock market can be an extremely difficult task; however, abiding by a set of rules can drastically increase returns. Here are 6 important rules to follow when investing in the stock market.
RULE #1: NEVER BORROW MONEY TO INVEST IN STOCKS
Like real estate, you can leverage your money investing into stocks; however, I do not condone this. Leverage in stocks is a little different than with real estate. For example, when getting a 30-year fixed-rate mortgage on a piece of real estate, the bank is not allowed to call all of the loan due at once if you make your payments on time. On the other hand, the lending company or brokerage firm that is lending you money to invest in stocks can take that money at any time they please, whether or not your portfolio is performing well at the time.
RULE #2: THE BEST TIME TO INVEST WAS 15 YEARS AGO, THE SECOND BEST IS TODAY
There is a saying that the best time to plant a tree was 15 years ago, but the second-best time is today. The same is true for investing. While it would have been great to start investing 15 years ago for many people, that doesn’t mean you can’t start investing today. Compound interest takes time to take effect, so start investing as early as possible.
RULE #3: DON’T LET INVESTING CONTROL YOUR EMOTIONS
Don’t invest in emotions. It will hurt you in the short-term, inevitably hurting you in the long-term. If you are buying certain stocks because they’ve been increasing immensely lately isn’t enough reasoning to back-up a good investment. Also, don’t just sell a stock because the price drops in the short-term. The market has minor fluctuations every day, and that does not necessarily give you a valid reason to sell. Before making an investment, always ask yourself whether you have enough research behind it, or if you are making the investment on pure emotion.
RULE #4: STOP TRYING TO GET RICH QUICK
If you want to become wealthy, you have to get all of the get rich quick schemes out of your head. Proper investing is not a get rich quick scheme, and for most people, it is hard to not fall into the trap of day trading penny stocks and bitcoin.
RULE #5: NEVER PICK JUST “HOT” STOCKS
In your lifetime, you have probably heard a friend, colleague at work, or a family member tells you about this next hot stock they are investing into. While they could be right, most of the time you should not put your money on it. If your friend is telling you about this stock, most likely a ton of people already know about it, and the price has already been set semi-efficiently, if not over-valued. Falling for these “hot” stocks often decrease investor’s returns rather than increase them.
RULE #6: ALWAYS DO YOUR RESEARCH
As Warren Buffet once said, “risk comes from not knowing what you are doing.”
This cannot be truer. Without researching stocks and companies before you invest, you are bound to fail, unless sheer luck pulls you through and when investing, we do not want to take those chances. Not doing your research before investing is to the same equivalent as taking a test without studying; the likelihood of you preforming well is slim.
WHERE TO GO FROM HERE
While all of these rules won’t guarantee you success in the stock market, it will offer you a path to follow on your way to becoming a successful investor. If you want to start investing, take the time to start learning and doing your research stocks first. You wouldn’t expect a doctor to help you without going through school first, so don’t expect to be a decent investor without putting in the time to learn about the pillars of investing.
Disclaimer: I am not a financial advisor, so please review all of this advice with your CFP or financial advisor first.