There are several ways in which an individual can invest their money, however, there are certain rules of investing that apply to them all.
The 14 most important rules of investing for beginners
Investing has become an essential part of life. With rising inflation around the world, investing is important to keep your wealth intact or even grow it.
You should start investing as early as possible, to give yourself the maximum amount of time to grow your money.
Here are 14 more rules to investing that every beginner should be aware of.
Everyone should set financial goals for themselves. A financial goal refers to a goal that requires a certain amount of money. For example, maybe you need to money for your children’s higher education, for your retirement, or to buy a new house. These goals require you to grow your wealth over time so that you can afford the expense when it comes.
Once you set your financial goals, you can calculate how much money you will need. In turn, this will tell you how much money you will need to invest in order to meet those goals. It will also provide a good indicator of your risk appetite.
Do your research
Do not rely on off-the-cuff advice for making investment decisions. You should always do thorough research before investing your money anywhere. There are several ways for you to invest your money You can invest in various capital markets and instruments e.g.: stocks, derivatives, bonds, commodities, currencies. Different capital markets/instruments have different capital requirements, returns, risks and level of expertise, strategy that is required. You should find an investment strategy that works for your financial goals and risk appetite.
Do not be fooled by marketing from financial institutions. You should always check and compare different means of investment with each other. Once you have decided where you are going to invest your money, you also need to keep a regular check on it.
Also, you need to do thorough research while picking and choosing broker that offers your desired instrument e.g.: If you want to trade stocks then you need to consider, whether you want to trade or invest in local stocks or in global stocks? Or do you want to invest in whole sector or top companies through bundle of top stocks through indices or ETFs and benefit from sector’s or top companies combined performance?
Selection and research on broker should be based on your choice of instrument. If you want to trade local stocks or ETFs, then you need to choose a GSE licensed dealing broker, but if you want to trade global stocks or indices like NASDAQ or FTSE or ASX or DAX then it can be traded via foreign regulated CFD brokers that offer NAS 100 & other global indices, and these brokers generally accept traders from all over Africa. Further, you also need to research other features of broker like regulation and fees/commissions, read following points to know more.
Analyze and manage risk
Every type of investment comes with its own risk profile. The first thing that any investor needs to do is to figure how much risk they can bear. Are you ready to risk 10% of your money? 20%? 50%?
As a rule of thumb, you should not risk more money than you can afford to lose. For example, you should never risk your life savings on risky investments like cryptocurrencies.
In order to find out how risky each investment option is, you need to do some market research. Look at the price history and returns of that investment option. Are returns guaranteed or are they linked to market performance?
Big returns means big risk
Always remember, the higher the chance of returns on an investment vehicle, the more risk you will be asked to bear. For example, even though investing in the stock market could potentially have higher returns, the risk is much greater when compared to investing in a fixed deposit.
As mentioned earlier, you should balance risk and returns depending on your financial goals. If your financial goals require you to get bigger returns then you may consider taking higher risk.
Always invest for the long term
There are two types of investors. Those who do short-term trading to take advantage of price fluctuations in the market. And those who invest for the long-term to receive returns based on improving fundamentals.
As a beginner, you should always invest for the long term. Investing for the long term carries less risk when compared to short term trading. Further, investing for the long term also means that your returns will be higher. Patience is the key to investing. When investing in the long term, do not be afraid of short-term price fluctuations in the market.
Don’t put all your eggs in one basket - Diversify to control risk
A good way to minimize the risk of your investments is to diversify your portfolio. Diversifying your portfolio means investing in a lot of different things at the same time. For example, you can invest 10% of your savings on cryptocurrencies, 20% of your savings in the stock market, 30% of your savings in real estate, and 40% of your savings in gold.
There are several different ways in which you can diversify your portfolio. You can diversify it by industry type, investment type, or risk type.
There will always be uncertainty in investing. The market shift suddenly, and you should be mentally prepared for it. The nature of the markets is dynamic, not static. Hence, you should focus your investments accordingly.
You should be flexible enough to be able to change your investments if the market conditions at a moment’s notice. Do not make investments that you cannot liquidate easily. Even if you do make rigid investments, then balance them out with other flexible investments.
Only invest through regulated institution or broker
It is paramount that you only invest through a broker that is either regulated by the Ghana government, or is regulated by top-tier foreign regulators. You should never deposit your money with an institution or broker that is not properly licensed or regulated.
There are several reasons for this. The most important reason is that regulation and licensing allows the government to hold this institutions accountable for their actions. Without such regulations, these institutions could enact scams or take part in fraudulent behavior. Further, in case of any misdemeanor, you may not be able to seek legal action against them.
In Ghana, there are 3 types of licensed member i.e.: Licensed Dealing Members, Associate Member and Government Securities Dealers (PDs that are authorized to offer Government Securities). GSE members offers electronic trading platform called GSE Automated Trading System (GATS). Securities and Exchange Commission (SEC) oversees and carries out regular inspection of GSE Licensed Dealing Members’ operations and books. Brokers are also required to submit regular returns to GSE. Trading and Surveillance Unit carries out regular surveillance on brokers. This ensures safety of investors and compliance at side of brokers.
Never invest in anything that you don’t understand
This is one of the golden rules of investing. Legendary investor Warren Buffet has been responsible for popularizing this rule. He does not invest in technology companies because he does not understand technology.
Similarly, you should only invest in assets that you understand. You should never join the crowd in investing on the next-best-thing unless you understand what it's about. For example, you should only invest in cryptocurrencies if you understand how it works and why it should have the value that it does.
In case you do not understand an particular asset but want to invest in it, then you should make all efforts to understand it before investing.
Monitor and review your portfolio
Do not forget to keep a track of your portfolio. As mentioned earlier, the markets are dynamic in nature. Things can change at a moment’s notice. Hence, you should be careful of monitoring your portfolio from to time.
The frequency at which you should monitor your investment depends on the type of investment. For example, if you’ve invested in real estate, then you should monitor your investment every year. However, if you’ve invested in stocks, then you should monitor at least monthly.
Factor in fees and charges
Investing is done through institutions and brokers. You should factor in the cost of their services while planning your financial goals and investment strategies. The overall cost of investing can be quite high depending on what you’re investing in.
For example, if you’re investing in stocks, then you need to pay to open and maintain a CSD account in your name with Central Securities Depository Company Limited, you need to pay brokerage charges for any stocks that you buy or sell, and you need to take care of a variety of miscellaneous expenses.
Hence, you should keep these costs in mind so that you’re not caught unawares later on.
Don’t panic and learn from your mistakes
It’s important to keep a calm mind when investing. You should not make investment decisions based on passing emotions. If suddenly you find that the value of one of your investments has suddenly dropped, you should avoid panic selling. In fact, you should take a step back and figure out your next move with a calm mind.
Further, you should have a plan for situations in which things go south. You should try to be prepared for emergencies so that you can take action with a rational mind.
You will make mistakes along the way. It is guaranteed. However, you should treat your mistakes as stepping stones which you can learn from. Try not to repeat the same mistakes over and over again.
Reinvest and take the benefit of compound interest
The biggest advantage of investing your money is that you can reinvest it to make it grow faster. Reinvesting your money means to invest the returns from your investments. For example, suppose you invested in stocks and got 10% returns. You should invest the 10% again into stocks so that your overall returns will be even higher next time.
In this way, compounding your investments can lead to a snowball effect. Use the magic of compound interest to your advantage.
Don’t try to time the market
The markets are always fluctuating. They are also subject to volatility in the short term. Ideally, you would want to make investments right before the value goes up and sell those investment before value comes down.
However, in the real world, timing your investments perfectly is impossible. Hence, rather than worrying about achieving the perfect timing, you should make sure that you make sound long-term investments relying on the fundamentals of the underlying asset or security.
We hope that these tips help you become an investor. These rules are time-tested and have been found to generally apply to all kinds of investors. As a new investor, you should focus your energies on learning as much as you can, and starting small. Also, always be aware of the risks of investing and only invest through safe and reputable brokers and institutions.
JOIN OUR PULSE COMMUNITY!
Eyewitness? Submit your stories now via social or: