Every game has rules and so does investment. To get it right, you must do it right. Playing by the rules will ensure you have consistent returns and will also help reduce the tons of anxiety that comes with investing.
The rules are not sure proof that you will never lose, but at least you will stand better chances of winning. They don’t come in any particular order and no matter how many times they get repeated they don’t lose their importance. They include the below:
Understand the investment product
As much as there is no specific order of applying the rules, to me this one stands out. Different asset classes compare differently in their complexity. It might be easier understanding buying stocks but difficult understanding how the futures and options work. The rule of the thumb is- invest in a product that you clearly understand. Know how to compute the cost of investing, the amount invested and the profits or loss gained or suffered respectively. Simply know the basics.
Know your risk profile
What differentiates any investment from any other venture is the element of risk. You either lose or make money.
You might have heard of the phrase ‘high risk high return and low risk low return’. What do you think of it? Any successful investor understands him or herself absolutely well. Can you withstand big losses? Or better still are you they type who would die if they make a very huge fortune? The latter is a very rare breed if they at all exist.
Knowing your risk profile will enable you to make an elaborate risk management system that will keep you in the investment game longer.
What are your investment goals?
People would invest for all manner of reasons. Some want to take vacations, some for retirement, some for quitting their daily job, a few to impress others, out of peer pressure perhaps and any other reason you can think of.
Understanding the goal is very important for obvious reasons. It will help you choose the investment product, take note of the respective cost implications, project duration of your investment etcetera. It has to be ac conscious decision!
Carrying out due diligence
There is one thing that is very certain; even big and well capitalized companies can fail. Either it could be fraud, poor management or whatever reason.
Before you stick your money wherever, please do a background check. Get someone to help you with the analysis and ask intrusive questions. It is important you take it as a matter of life and death.
Ofcourse this list is not exhaustive, but it is important to play by the rules above and the many others. Have you heard of the saying the house always wins? It is because they strictly play by the rules.
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