The Basics of Investing
Debt Impact
- Posted:
4/2/2009
Investing is a complex exercise only because we insist on making it so. But the basic principles are simple. As simple that anyone can become a good investor just by following simple and easily understood rules, which also help avoid big mistakes. Here are my rules for investment success.
Develop a Plan: For your short-term goals, make sure you're taking appropriate risks. Invest money that you'll need in the next two years to five years in cash and short-term bonds. For your long-term financial goals, consider equities.
Keep It Simple: Buy a diversified equity fund and a floating-rate bond fund for fixed income exposure.To keep fund selection simple, stick with a diversified equity funds of well-established fund families. Equities prove to be the best performing long-term asset class. Stay away from exotic specialty and sector funds, unless you have a huge risk appetite and you can take in your stride a 25% loss in a quarter.
Ignore the hot stocks and funds: If you buy this year's top-performing fund or stock, be prepared to see it at the bottom next year. The fancy academic expression for this phenomenon is -- Reversion to the Mean.
Invest Regularly: Investing a little bit of money each month is the surest way to reduce the risk of investing, because you lessen the possibility of buying at the market top.
Buy and Hold: Short-term trading makes more brokers than investors rich.
Start Early: It is not the "market timing" but time in the market that matters. Power of compounding will turn things in your favor.
Investing is a long-term proposition. Research your investments, remember your goals, re-examine your risk, and limit how much you listen to day-to-day market commentary. And don't let your emotions overpower your sense of reason.
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