Are you investing your money in the stock market? If not, I know the reasons why. You either think investing is too complicated, so you keep putting it off until later, you are scared to invest because of all the conflicting information out there, or you think you need thousands of dollars to invest.
The reality is all of these reasons to not invest are just excuses. When you break investing down, it is really simple to be successful. And when you learn just a little bit about investing money, you quickly get over your fear.
And finally, thanks to technology, you can start investing with a lot less money than you think.
The bottom line is, there is no reason why you should not be investing your money in the stock market. After all, investing money is one of the key tips that will help you to become rich.
So in this post, I am going to lay out the five rules you need to follow. These are the investing basics I follow that have helped me to grow my wealth to close to 7-figures.
If you can follow these simple rules, I am certain you too can grow your wealth investing in the stock market.
5 Basic Investing Rules To Grow Your Wealth
1. Have A Plan
Before you even think about investing in the stock market, you need to have a plan. This plan should detail specifics about investing money for you and include the following:
- What are your goals? What is the reason for investing your money
- How long will you be investing your money for? What is your time horizon?
- What is your risk tolerance? Are you able to handle wild market swings?
- What types of investments make sense for you?
By going into detail with your investing plan, you will have a reference to look back on when the market gets volatile. And it will.
You will understand why you are investing and what you are investing in. Then you will be able to make smart, well-thought-out decisions as to what to do next, and if any action on your part is even needed.
Here are a few extra tips on each point to help you make the best investment plan for you.
Be sure to get specific as possible. Don’t make your goal “retirement”. Detail what retirement looks like to you. Does it mean you will be volunteering a few days a week? Watching your grandkids?
The more specific you are, the more your goal will resonate and have meaning to you. This will help you when times get tough.
Investing in the stock market is ideal when your goal is five years away or more. Anything less and your money is best saved in a bank savings account.
Therefore, make sure you understand when you plan to need the money as this will play a big role in your investment decision.
This is a tough one simply because most people allow their emotions to cloud their judgment. If you take an online risk tolerance quiz, make sure you pay attention to the potential losses more than the potential gains.
We tend to focus on the gains, and end up with a portfolio that is too risky for us. Then when the market crashes, we get scared and sell. My favorite risk tolerance quiz is this one from Vanguard.
Types Of Investments
For most investors, investing in mutual funds or exchange-traded funds is the way to go. They allow you to invest a small amount of money and be diversified from the start.
In fact, you can get started investing in these types of investments for as little as $25. And if you would choose to invest with one of the many robo-advisors out there, you can invest for as little as $10!
In order to be a successful investor, you need to be certain to diversify your investments. What does this mean?
If you open up your closet and look at your clothes, you will get a good idea of what I am talking about. Chances are you have various types of shirts and in many colors and patterns.
The same is true for your pants, skirts, shorts, and even shoes. This wide variety of options can be seen as a diversified closet.
If you only had white dress shirts and black pants and shoes, you would not be diversified. Every day you would be wearing the exact same outfit.
Investing is the same. You want to invest in a variety of different companies and assets. When you invest in stocks and bonds, you lessen your risk and still are able to earn a decent return.
This is because most times when the market goes down, not everything drops. Only certain sectors or areas of the market drop on any given day. So by having your money invested in various sectors, you hedge your losses.
Your investment in one sector might have lost money while the money you have in another sector made money. When combined, you didn’t lose as much had you only invested in the one sector.
The good news is that you can quickly diversify your investments by investing in mutual funds and exchange-traded funds.
These types of investments own stock in hundreds or thousands of companies. So buying one mutual fund gets you diversified from the start.
3. Invest Long Term
The next step in the process is to invest long term. This doesn’t just mean to invest until you reach your goal. It also means to stay invested even when the market is dropping as well as invest on a regular basis.
I know to some of you this might sound odd. Why would you stay invested and keep investing when the market is dropping and you are losing money?
The answer is simple. You do not know what is going to happen in the market tomorrow. No one does. So even though the market is dropping today, it could rise tomorrow. Or it could fall more.
By staying invested, you are taking advantage of the market rising. Need more proof? Here is an excellent study that was done by JP Morgan that shows investors returns when they try to time the market.
By simply missing a couple of days, you have the potential to miss out on a lot of growth. And no one knows when these days are going to happen. Therefore, you have to stick with your investments for the long haul.
If you still think this might be tough, take a different view of things. When the market declines, think of investments being on sale. With a lower price, you will be able to buy more shares.
Then when the market rebounds, which it will eventually, you will make even more money on those investments you bought at low prices.
This strategy helped me well during the housing collapse in 2008. I kept investing during the market turmoil. By 2011 I had earned all my losses back, and just a few short years later, I had doubled my money.
4. Ignore The Noise
Even with the strategy of viewing investments on sale when the market drops, you can be swayed to act thanks to outside forces. I call these forces “noise,” and it comes from the media and Wall Street.
Let’s tackle the media first. They make money through advertisements or commercials. In order to get advertisers to pay the most money for ad space, the media company has to show that people watch their channels or read their magazines.
The media company gets you to watch by sensationalizing stories. This is why when the stock market drops, you see red colors on the screen, pictures of people in anguish, and they use power words like collapse, wipe out, turmoil, meltdown, plummet, and destroy to get you emotionally hooked.
They also like to tell you how much the average investor lost, just to drive the point home.
When it comes to Wall Street, they make money on trades. So the more people trade, the more money the big companies make. So they too hype and sensationalize things, and introduce new and better types of investments to get you to react and buy and sell investments.
Now that you know their tricks you can take action. Turn off the television or don’t read the magazine article. Stop checking your account balances every day.
What I found worked best for me early in my investing career was to only check my balances on days the market was up. This helped me to avoid getting scared and selling based on emotion.
The more you can remove yourself from the situation, the better. If you are investing for a goal that is ten years away, some short-term volatility isn’t going to matter to you in the long run.
5. Review And Revise
You have your investment plan, you are diversified, you are investing long-term, and you are ignoring the noise. What else is left for you to do?
Even though I told you to ignore what was happening in the stock market, it doesn’t mean you can turn a blind eye and forget about your money completely.
Aim to review your investments and your investment plan annually. Has anything changed with your plan? If so, then you need to look over your investments and make the adjustments.
What about your portfolio? Chances are with the market moving throughout the year; your asset allocation is not like it was at the start of the year.
Therefore you need to move some money around to get you back in alignment. This is big because if you let your portfolio get too out of alignment, one of two things is going to happen.
1. You will have too much money in stocks. While you will be earning more money when the market goes up, when it comes down, you are going to lose a lot. So much that you will get emotional and will have to fight the urge to sell everything.
2. You will have too much money in bonds. This means you won’t risk losing very much money. But you won’t be earning enough for you to reach your goal. When it comes time to use the money you were investing, you will see you are short by a lot.
So take the time to review and revise your investments at least annually.
Related: How To Calculate Your Net Worth
At the end of the day, if you can follow these five basic rules to investing, you will be a successful long-term investor. By far the hardest part is keeping your emotions in check.
This makes sense since money is emotional to most of us. But if you can take the time to figure out how to take a step back and stick with your investments for the long term, you are going to see success.
Jon helps people improve their finances one day at a time at his blog Compounding Pennies. By making small changes every day, you will see a massive change over time. And this change will help you to realize your dreams.