Investing is both an art and a science. If you want to maximize your investment return, you’ll need to understand some basic investment rules. Following these rules can help you minimize risk while enhancing your growth potential. Here are 10 rules for beginners and seasoned investors alike.
1. Define Your Investment Goals
Before you invest a single dime, set one or more investment goals. Then, you can craft a portfolio that aligns with these goals and your risk tolerance level.
Your risk tolerance level is key. Generally speaking, the higher the promise of return, the greater the risk. Low-risk investments may not offer dramatic payouts but will help you build wealth long-term.
Your strategy will depend on your investment goals. For instance, if you’re hoping to build your wealth and save for retirement, you’ll want a long-term investment strategy with minimal risk.
Set a date for your investment goals. Setting a realistic date will help you monitor your investments over time and make adjustments to keep yourself on track.
2. Set a Budget
Once you define your goals, your next step should be to set a budget. If you’re married, you and your spouse should make this decision together.
It’s usually wise to clear up high interest debt before you invest. The average stock market rate of return is around 10%, but recent data shows that car loan interest rates start at nearly 13%, and credit card interest rates are 24.25% on average. Your investments are unlikely to outperform these rates.
While following these investment rules can mitigate your risk, you should never invest more than you’re prepared to lose. Similarly, it’s never wise to put all of your savings into an investment account.
Instead, keep an emergency fund for unexpected expenses. Aim to save at least three to six months’ worth of expenses before you make a major investment decision.
3. Start Investing Early
The sooner you start investing, the more time your money will have to grow. The U.S. Treasury Department offers an investment calculator to help you visualize your investment returns. This growth calculator allows you to set interest rates and timelines so that you can plan accordingly.
Are you wondering how to start investing with little money? Consider starting off with a small amount in a mutual fund or index fund. These collections of stocks provide built-in diversification and minimize risk, allowing you to build a balanced portfolio without the expense of purchasing individual stocks.
Some employers offer matching retirement contributions. Take full advantage of these programs; otherwise, you’re missing out on free money that could go toward your retirement savings.
4. Research Every Investment
Never invest in a company you don’t understand. That’s true even if other investors are jumping on board with a hot new start-up. Instead, make sure to research every investment you make. When it comes to stocks, look at data that includes:
- Net income
- Earnings per share (EPS)
- Price-to-earnings ratio (P/E ratio)
- Industry and market trends
For stock tips, you might consider subscribing to an investment newsletter or becoming a member of an online investment platform like Gorilla Trades.
5. Diversify Your Portfolio
One of the most important investment rules is to diversify your investments. To “diversify” means to include multiple types of investments in your portfolio. That way, if one of your assets performs poorly, the risk is offset by your other investments.
Investors can diversify in two ways. First, you can diversify your asset classes, meaning you invest in things like:
- Real estate
- Precious metals
- Art and collectibles
You can also diversify within an asset class, usually by investing in stocks from multiple sectors (e.g., healthcare, consumer staples, energy, or technology).
6. Invest Regularly
One great way to improve your investment returns is to invest regularly. Many financial planners recommend a 50/30/20 approach to household budgeting. In this model, 50% of your monthly income goes to your needs (mortgage, utilities, etc.), 30% to your wants (streaming services, meals out, etc.), and 20% goes to savings and investments.
If you’re still building your emergency fund, you might split that 20% evenly — saving 10% in a bank account and investing the other 10%. But once you’ve built up your savings, you can divert more of your income into an investment account.
Adding to your investments may mean purchasing more shares of a high-performing stock. But it may also mean purchasing additional stocks to balance risk and diversify your portfolio. Either way, the more you can invest, the greater your chances of strong investment returns.
7. Focus on the Long Term
Every investor dreams about striking it big with the next hot new start-up. But it’s rare for a company to achieve the meteoric rise of Apple or Amazon.
Instead, focus on buy-and-hold stocks. These are typically large, stable corporations that offer little risk but a strong potential for steady, long-term growth. Large-cap stocks tend to be ideal choices for retirement planning since the truest investment returns will be seen over many years rather than in the immediate future.
8. Don’t Try to Time the Market
Some investors try to time the market — they attempt to optimize their returns by guessing where the market will go. But the stock market is unpredictable. Not only are you unlikely to succeed in beating the market, but you also expose yourself to unnecessary risk.
Alternatively, you might consider an index fund. These funds are uniquely designed to match the performance of a stock index, such as the S&P 500 or NASDAQ.
Even investment guru Warren Buffet says that investors shouldn’t try to select individual stocks. An index fund may not beat the market, but it will provide reliable returns that reflect the performance of the index.
9. Watch Out for Taxes and Brokerage Fees
Taxes and brokerage fees can take a bite out of your investment returns. If you sell your investments at a profit, you’ll be responsible for capital gains taxes. But you can minimize your tax liability by using your losses to offset any gains.
Imagine that you sell two stocks. The first sells for a $10,000 profit, but the second sells at a $3,000 loss. That means you’ll only be taxed for your net profit, or $7,000.
Transaction fees vary by broker. Research brokerage platforms before you sign up to find the right fit with the lowest fees. You can also minimize brokerage fees by reducing the number of trades you make or by lumping your transactions together.
10. Review and Monitor
One of the most important investment rules is to stay on top of every investment you make. By monitoring each investment, you’ll have a better idea of the progress you’re making toward your financial goals. Likewise, you can make adjustments to your portfolio in case you’re stuck with an underperforming stock.
This tip is another reason to invest in a stock newsletter or research platform. Having access to the latest stock market or industry news can make you a more knowledgeable investor and help you make the most of every dollar you spend.
Simple Investment Rules for Strong Investment Returns
These investment rules can help you minimize your risk and maximize your investment returns. But if you want to go deeper, you might want to invest in an investing platform. Gorilla Trades members get access to research tools, tutorials, and more. Sign up for a free trial and receive 30 days of free stock alerts delivered to your inbox.