The 3 Rules Every Investor Should Follow
I celebrated my 60th birthday last weekend by playing in a competitive pickleball tournament. That’s probably not how most people would usher in their “golden years,” but I’ve never been one to take it easy. I prefer to push myself to see how far I can go.
Perhaps that’s why I chose a career as a stockbroker at the tender age of 24. Admittedly, I didn’t know much about investing back then. But I felt the country had just entered a golden era of capitalism that would drive the stock market to record highs.
Fortunately, I turned out to be right about that, and then some. On the day I became licensed to execute trades in client accounts — January 31, 1984 — the Dow Jones Industrial Average closed at 1,220. Now, the Dow is valued at more than 20 times that amount!
Even with the benefit of hindsight, there isn’t much I would change. I have learned many valuable lessons about investing over the past four decades. These three stand out as the most important that I would pass along to future generations of investors.
Rule 1: Start Investing as Soon as You Can
There is no point in life when a person automatically becomes an investor. Some people wait until they have accumulated a certain amount of money before opening a brokerage account. But it’s not about how much money you have. It’s about how you allocate your assets and liabilities regardless of the amount.
Investing is a mindset that for some people kicks in at a relatively young age. Warren Buffett famously began investing as a teenager with earnings from his paper route. My brother asked for 25 shares of Safeway stock as a 16th birthday present from our parents way back in 1971. As for me, I opened my first IRA at the age of 25 and bought a mutual fund. Back then, we all learned the hard way through trial and error.
These days, you don’t need to risk any money at all to learn how to invest. Many online brokerage firms will allow you to “paper trade” stocks and options so you can see how well you would have done. That’s a great way to get over the initial fear of investing and learn how much risk you can really tolerate before you put your hard-earned money at risk.
Rule 2: Have a Repeatable Process
Investing is a constant process of decision making. When those decisions are driven by a rational approach to evaluating risk and return, good things should happen over time. But when that process is highjacked by emotions, the outcome is usually not nearly as good.
For that reason, it is essential that you have a decision-making process that is both rational and repeatable. However, that does not mean that it must be complicated. Peter Lynch, arguably the most successful mutual fund manager of all time, had a remarkably simple investment process. From 1997 through 1990, Lynch produced an average annual return of 29% while at the helm of the Fidelity Magellan Fund.
Lynch had a simple mantra: Invest in what you know. If there is something about an investment that you do not understand, then don’t do it. Lynch also believed in GAARP, or “growth at a reasonable price.” He used the PEG ratio to identify companies that could grow earnings at a faster rate than their price-to-earnings ratios. Simple, but very effective and repeatable.
Rule 3: Avoid Depreciating Assets
Every financial decision you make comes with an opportunity cost. Choosing to sink $10,000 into a Treasury bill yielding 2% may help you sleep better at night. But you might have nightmares if you thought about how much money you could have earned had that same money been invested in the stock market.
That’s why I don’t drive an expensive automobile. I certainly can afford one, but I know all too well how much that type of car would really cost me over the long haul. I could spend $60,000 (or more) on a new Tesla, but over the next 10 years that car would really end up costing me more than twice that amount if I invested that same money in a solid growth stock.
Therefore, it makes sense to put more of your money in appreciating assets (such as the stock market or real estate) and less in depreciating assets (such as automobiles). Sure, the stock market will have its occasional correction that may cause you to question the wisdom of that decision. But in the long run, you’ll be much better off.
Know Your Limits
The rules above should be observed within your unique set of performance objectives, risk tolerance, and personal values. What’s right for your best friend may not be right for you. In fact, it probably isn’t. What’s right for you is whatever allows you to achieve your financial objectives in a manner that does not cause you undue stress or put you in harm’s way.
Investing is not gambling; it is a systematic decision-making process that is not dependent on luck or random outcomes to be successful. If you are not yet comfortable making investment decisions on your own, then I suggest you allow my colleague Jim Fink to do that for you.
Jim Fink, chief investment strategist of Velocity Trader, is a seasoned veteran of Wall Street who over the decades has witnessed bull and bear markets, economic booms and busts. And through it all, he has consistently made money for his followers.
Jim achieves trading success via his proprietary trading system, called the Velocity Profit Multiplier (VPM). The product of painstaking trial and error, the VPM can predict when a stock is about to rise, or fall, with remarkable precision.
Jim’s VPM has now pinpointed a trade that could generate up to 163% in quick profits, whether the market goes up, down or sideways. Click here for a free presentation.