When it comes to building real wealth, putting your money to work for you by investing it is the way to go. However, while it's very easy to get caught up with what everyone else is doing, it's important to keep in mind that your investing objectives and risk tolerance are personal and will very likely differ from that of the next person and so you can't go along with popular opinion when it comes to your investments.
It's also important to keep certain guidelines or rules (that every smart investor should know) in mind as you invest your money and here they are below:
1. Invest for the long term - 5 years or more
As you decide how to invest your money it's important to keep in mind that investing is for the long-term and you should only be investing money that you won't need for at least 5 years or more (10+ years) if possible. Investing can be unpredictable and you want to give your money time to grow and reap the rewards of compounding.
The last thing you want to do is have to sell your investments during a market downturn. That being said, it's important to get rid of debt and create a solid emergency fund before investing.
2. Understand your fees
Fees, also known as your investment expenses, can add up to a very large amount over the lifetime of your investment if care is not taken. I'm talking tens or even hundreds of thousands of dollars depending on how much you have invested and so it's import to under the different fees associated with your investments and shop around to ensure you are getting the best deal.
Fee types include:
- Brokerage commissions for buying and selling your investments (One type fees)
- Annual maintenance fees on your investment accounts (Typically based on a percentage of your portfolio)
- Management fees for any investment advisors managing your portfolio (Typically based on a percentage of your portfolio)
3. Invest in funds instead of individual stocks
Unless you have several hours each day to monitor your stocks or have a strong understanding of the stock market, it's a better idea to invest in funds (i.e. mutual funds, index funds or ETFs). Investing in funds can help you create a well-diversified portfolio as they typically include a wide variety of stock or bonds which avoids you putting all your eggs in one basket.
Keep in mind that you may have to pay additional fees for investing in a fund vs individual stock especially if the fund is actively managed. It is also very important that you do your research to understand the composition and objectives of the funds you invest in. I'm a huge fan of index funds and you can learn why HERE.
4. Determine your risk tolerance
When you invest your money, you assume the risk of losing part of your investment and so it's a great idea to determine your risk tolerance to make sure your tolerance level is in line with your investment objectives so you don't lose sleep every time there is a market dip.
The longer you keep your money invested, the longer it has to grow and the longer it has to recover in the event of a market downturn e.g. a recession. Take this quiz HERE to determine your risk tolerance. You should never take on more risk than you can personally handle.
5. Rebalance your portfolio
To be sure you are staying on top of your investing objectives and timeline, you want to set reminders to rebalance your portfolios every quarter or at least every year. As the market changes and fluctuates, you'll want to ensure that your investments are balanced according to your long-term strategy.
Following these 5 rules in addition to doing your research and educating yourself, will help you make smart decisions on how and where you invest your money with the ultimate goal of reaching (or even exceeding) the long-term financial goals you have set for yourself.