One of the keys to successful trading is the introduction of time-tested trading rules, which you consistently follow over time. Financial success and independence are different for everyone. However, proven investment rules and wealth building strategies can be the same for you as in the case of Bill Gates or Warren Buffet.
The rule is a:
A basic truth or proposition that serves as a basis for a belief or behavioral system and/or a chain of reasoning.
Rules or beliefs that govern one’s own behavior.
Investment principles seem to be quoted everywhere. They are usually located at the front (or close to the front) of most marketing brochures and/or websites. This is because they are extremely important. I say that one of the most important questions you can ask a financial advisor with whom you are considering working is this: “What are your investment rules and please explain them to me.
One of my most memorable ah-ha moments about this came when I was in San Francisco in the mid-1990s. I attended an important meeting led by Charles Schwab & Co. Let me share a moment. Charles Schwab had several hundred branches throughout the country. It was a three-day annual meeting of branch directors in San Francisco. Just a few years earlier, we began to provide investment advice to clients. One of the questions we fought to answer in this new consulting world was: “What we can say and what we should not say to clients to help them make investment decisions.
Sounds like a simple question to answer? Trust me that this was not the case. We had to be able to provide guidance broad enough to help clients and narrow enough to train all advisors to give good, practical advice to clients across the country. That is why the sessions on this topic were very lively. Charles Schwab was active in running the company at the time and this seemed to be felt because he shared a list of the seven “Investment Principles” during one of the question-and-answer sessions. Basically, these were investment principles. The Seven Thumb Principles eventually became the Ten Investment Principles, which Charles Schwab & Co. applies today. Some of these principles, along with a few that I myself have added, have since guided my investment decisions.
I have listed my mine (along with some other investment rules) below to give some concrete examples. In my career, I have met hundreds of such rules, and these are just some of the better ones I have met. But I want to make it clear that you need to have your own four or five principles that guide your investment decisions. And you have to believe them!
There is no mysterious book or omniscient place where you can find investment rules. You will also find that these principles must be applied in combination. Success will not result from using only one of them.
Again, four or five personal investment rules applied in combination and consistently over time will greatly increase your chances of financial success. They will become your “lighthouse in the storm” and trust me, they will be storms. Investment rules are the reason why some people seem to be moving from one market crisis to another, experiencing minimal stress.
Here are some examples of investment rules
Invest for a long time – to quote Warren Buffet, “Our favorite period of ownership is forever”. Although this is not always recommended or practical, it is a great long-term investment prospect. Looking at investments from a long-term perspective, we try to adhere to the investment principle, although we will review and monitor all investments for changes in their fundamentals to make sure that they are investments that we should continue to maintain.
Not time in the market; always being invested – time in the market is very difficult. When time in the market, the challenge is to be right twice – to know when to exit the market and then know when to return to the market.
Know your risk tolerance – that’s the basis for a long-term perspective. If you know your investment tolerance, you don’t make emotionally charged decisions to enter or exit the market at the wrong time because of instability.
Be an investor, not a saver – the investor takes into account the risk/profit and actual rates of return after inflation, while the saver only focuses on the security of capital.
Concentration creates wealth, diversification protects wealth – it is good to have a concentrated position at different moments in a person’s life. This is how wealth is created in many cases, although it must be done at a time when the customer has income, other assets and time.