6 simple rules for perfect investment

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

According to most experts, almost everyone can profitably invest. It is enough just to follow a few simple recommendations, avoiding large losses and controlling risk.

1. Always choose multiple destinations

Diversification is the insurance against ignorance.

William O'Neill is an American writer and successful entrepreneur

For a better understanding, consider two fictional characters. The first is named Vasya, he has 400 thousand rubles, and he decided to buy shares of a well-known company with them. The second character is Petya, he also has 400 thousand rubles, but with this money he bought shares of ten companies from different industries at once.

By the end of the year, Vasya's shares fell in price and he received a loss. In Petya's 7 out of 10 shares fell in price, but the rest grew several times and made a huge profit. Luck? It is unlikely, because according to the theory of probability, Petya was initially closer to victory than Vasya. Now imagine that not ten different companies have bought shares, but thousands, including those on foreign markets.

This phenomenon is called diversification, and it occurs in many areas of life. Companies diversify production, sales markets, currency. It is worth noting that it is important to buy not just shares of various companies, but to ensure that they are from different industries.

Some popular entrepreneurs and investors criticize diversification (for example, Warren Buffett and Robert Kiyosaki), but the fact remains: it is used, used and will be used by professionals.

2. Prepare for the worst

My principle is to first of all strive to survive, and only then to make money.

George Soros American investor and philanthropist

The first thing to do when buying securities or currencies is to assess the risk. How much percent of your capital will go to the bottom if you turn out to be wrong? Professionals are convinced that the acceptable amount of risk is 2% of the available funds. The reason is the high probability of a losing series. Imagine making mistakes 10 times in a row, and this is quite possible. As a result, losses will amount to only 20%, and risking more, you can easily find yourself bankrupt.

There is a whole area of management activity - risk management. Banks and large investment companies even provide for the position of a risk control specialist. If you want to invest right, then you should become your own risk manager.

3. Ignore rumors

Fundamental information about the market that you learn is usually useless because the market has already accounted for it in the price.

Ed Seykota American professional asset manager

Another rule that is highlighted by experienced investors is a global view of the market. Unfortunately, many sources of information exaggerate the significance of many events in the financial world. Of course, some of the most important news carries weight, but it shouldn't be overestimated.

The background is just a small piece of a huge puzzle that needs to be solved. Markets are not governed by anyone's laws, there is always a buyer and a seller. You never know which large participant would like to start buying assets today for reasons only known to him.

4. Be in trend

The trend is your friend, but not at the end when it goes round.

Ed Seykota American professional asset manager

If you look at the market globally, as recommended above, it will become obvious that price movements are subject to trends. In some years, assets become cheaper, in others they become more expensive, and sometimes there is a price corridor (when prices do not have a clear direction).

The only way to make money on investments is to correctly determine the current price dynamics. For this purpose, various types of market analysis are provided, for example, technical analysis and its directions.

In addition, the time factor is of paramount importance. Estimate how much a financial instrument passes on average per day, week, month and year. This information will provide you with a statistical advantage as you set reasonable goals and record profits in a timely manner.

5. Cut losses as quickly as possible

Rule # 1: Never Lose Money. Rule # 2: Never forget rule # 1.

Warren Buffett is America's greatest investor

Any investment most often involves long-term positional trading (holding stocks). When a trade brings only losses, you should get rid of it as soon as possible.

The most rational approach is to create a plan by placing a protective stop order in advance to exit the trade. This will free you from the emotional problems associated with accepting losses. Many professionals give 80% of success to emotion and psychology, so this rule should not be overlooked.

6. Let Your Profits Rise

When the market moves in a favorable direction, you become afraid that the next day will take all of your profits, and you exit the game too early. Fear prevents you from making as much money as you should have made.

Jesse Livermore legendary American stock speculator of the early 20th century

This rule is closely related to the previous one. It all comes down to intelligent position tracking. The market is irrational, sometimes trying to predict its movements is pointless. Proper money management is the solution to the problem.

By following the above recommendations, you can protect yourself from many mistakes and disappointments. Passive investment income is a reality, especially since it is already a common practice abroad. To achieve success, you just need to work on yourself a little.

What do you think about investments?