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The points we’ll go over here represent tried and tested approaches to investing. They apply across a variety of investment types: real estate, private equity, stocks, commodities, debt instruments, and so on. If you’re enthusiastic about investing, you’ll find these rules a helpful guide to creating and managing your portfolio. Let’s dive in.
Do Your Homework First
This is the first rule, and it’s really important. Investing in something that you haven’t properly researched is a recipe for disaster. Do not buy a stock or finance a business just because it’s the “hottest” thing right now. Instead, investigate opportunities and decide for yourself whether or not they are worth investing in. Let relevant data guide you, not public sentiment.Know Your Risk Appetite
Some people avoid risk at the faintest sign of its presence. Others are attracted to it. These innate tendencies may affect the investment choices of individuals. You need to know whether you are comfortable with your assets temporarily losing their market value, or if you’d rather stick with safe but low-yield opportunities. If you venture into high-risk investments as a person with low risk tolerance, you may make rash decisions under pressure that’ll cost you a lot of money.Only Invest in Things You Understand
This is related to the first point, but it’s a broader idea. If you can’t explain how the stock, business, or instrument you’re investing in actually works, you shouldn’t be putting money into it. The more detailed your knowledge of an industry, the better you’ll be at spotting genuinely good investment opportunities. But if you don’t understand the assets or sectors you want to buy into, you may choose poorly and suffer losses as a result.If it Sounds too Good to be True, it Probably is
This is pertinent for the Nigerian context. People who aren’t financially educated are prone to falling for schemes that offer huge returns within very short periods. For example, they may be lured by the promise of a 50% return on their investment within 48 hours, or 100% profit in one month. Know this: such offerings are almost always scams. The probability of achieving such returns is near zero, let alone sustaining them over longer periods.Avoid Consumer Debt
If you’re frequently racking up consumer debt, you will struggle (and probably fail) to keep up with investing. That’s because whatever you make will continually go to settling your debts. This is true whether you’re already invested or are just trying to accumulate savings for that purpose. However, debt incurred to secure an income-yielding asset (e.g. mortgage) may be beneficial.Sign up for the Connect Nigeria daily newsletter
Only Invest Money You Can Afford to Lose
Some people are so eager to reap returns that they invest money that should be their emergency fund. Then they are left desperate when an unexpected need arises and they can’t immediately liquidate their investments to cover the cost. To reduce the likelihood of this happening to you, be sure to build up an emergency fund (worth 3 to 6 months of your monthly income) and get insured before committing anything to investments.Time in the Market Trumps Timing the Market
You may love the idea of day trading or some other kind of short-term strategy of purchasing and selling stocks. Or you might think that repeatedly getting into the market at rock bottom prices and getting out at the peak would give you better ROI than just holding over the long term. But here’s the problem: people who try to time the market typically end up with poorer results than those who select a few quality investments and keep them for extended periods. And at least 90% of day traders operate lose money (a well-known fact).Master Your Emotions
Being able to regulate your emotions is a great advantage in investing. It’s especially crucial for people who have riskier investments. If you let fears or exhilaration cloud your judgment, you’ll make irrational decisions that’ll result in your losing money. But if you’re more informed by facts, you can win even in tough conditions.Tap into the Power of Compounding
One great advantage of staying invested for the long term is that you enjoy the effect of compounding. This means that your returns also yield returns, ad infinitum (or as long as you hold those investments). Note that compounding happens when you’re reinvesting the returns you’ve made. Topping up your investment accounts, buying more of your best-performing assets, and building more income-generating property with portions of your monthly salary receipts are also ways to supercharge your earnings.Buy the Fear, Sell the Hype
One last rule: when people are flocking to an investment opportunity en masse, it may be time to sell your stakes in that area. There are many reasons why this makes sense. Higher demand allows you to cash in on your investments at a higher price, and therefore, a profit. Also, numerous people buying into the same thing signals a bubble, which could burst at some point. When it does, many of those latecomers will be left “holding the bag”—that is, owning an asset that’s worth less than the price they paid for it. Similarly, you may “buy the fear” or invest in solid stocks when most people are pulling out. This lets you acquire the assets concerned at a discount; the value of your investment will then rise when prices rebound. Note, however, that this only works for businesses with strong fundamentals (healthy finances, growing market, competent leadership, etc.).Register to attend the CN Business Mixer
Final Words
These rules of investing are universally applicable, albeit with localised variations when it comes to the fine-grained details. As general principles, they will serve any investor well.Got a suggestion? Contact us: editor@connectnigeria.com
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