What is a Good Rule for Investing in Stocks? The Dos And Don'ts What is a Good Rule for Investing in Stocks? The Dos And Don'ts

What is a Good Rule for Investing in Stocks? The Dos and Don’ts

Investing in stocks through an investment platform can be potentially helpful to beat inflation and create wealth. If your money does not outperform inflation, then there is a high chance that it will lose value.

This can be detrimental to goals like financial freedom. After all, the first step towards financial freedom is to start investing early in your career. Then stay the course as long as you can and have a smart and actionable plan.

These are the three broad pillars of investing in the stock markets. Delving deeper into the mindset of a successful investor can be useful. That’s why we bring to you some age-old rules which one should keep in mind while investing in stocks.

1. Think Like an Owner

It’s a common mindset to buy a company’s shares and treat it purely as an investment. However, it can be useful to think of it as an owner. You are buying an ownership stake in the company by investing in shares

While traders speculate through instruments like futures and options in the short term, an investor has the luxury of fractional ownership in the company for the long term. This may allow an investor to hold the position until a company grows and grows.

2. Make a Plan and Stick to It

If you have an investment plan, stick to it. That is, if the investment plan is geared towards your financial goals with the right strategy. Review your investments periodically and determine if your risk appetite is in check.

Never make a decision in haste, and stick to your long-term investment objectives. Warren Buffett states, “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.

3. Begin as You Mean to Go

Investing in stocks is generally considered to be a long-term journey. In the short term, negative trends, news, and other factors are known to make stock prices volatile. But do not let your biases get the better of you.

The objective is to stay invested in the long run to work towards distant goals like financial freedom. It would be helpful to stick to your plan and invest in quality companies growing consistently.

Whenever there is a volatile period like a bear market, review your portfolio, stick to winners, and move your money to quality companies available at a deep discount. This is the key to making wealth over the long term.

4. Focus on Quality

Investing is in, principle, difficult but can be made that much simpler if you focus on quality. Problems arise when investors run for tips from pseudo-experts and in the process, ruin their financial stability.

Great investors like Warren Buffet generally focus on investing in shares of industry leaders who have been and may continue to thrive for decades.

That’s why it is wise to build a portfolio of quality companies. Make smart buying decisions and let time make you money. If you understand compounding, you can make wealth over the long term by investing in stocks.

5. Always Diversify. Don’t Diworsify.

Diversification is the key to investing. As markets mature and new technologies come into existence, you may need to move your investments to better themes. This is where diversification will play a huge role.

Some companies will last for decades, and some may be cyclical in nature. Thus, always make sure you diversify sufficiently. Volatile periods are known to offer an opportunity to review, diversify, and rebalance.

But make sure you don’t over-diversify and have too many stocks in your portfolio, as this leads to diworsification and not diversification.

6. Manage Your Risk

Always measure returns with risk. Being comfortable with your investment plan in terms of risk and reward is one of the best ways to manage a portfolio. Over-diversification may minimize your return while no diversification may lead to concentration risk.

Make a balanced portfolio where your top picks may hold higher weights, and small-caps and turnaround bets or demerger stories constitute a small portion of your portfolio. This is one of the ways you manage risk.

Evaluate your investment psychology and focus on building a conservative portfolio of stock investments if you get anxious about short-term market volatility.

7. Be a Smart Investor

Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.

Warren Buffett

We all know that we shouldn’t lose money. That’s why you should know your downside. If you buy companies at high valuations when markets are going over the roof, you may not see enough upside.

But if you buy fundamentally sound companies at deep discounts when markets are volatile, you may be able to protect your downside to a certain extent. Thus, it pays to be a smart investor!

Read more blogs about investing in stocks:

1. How to Choose Right Stocks for Long Term Investment?

2. 6 Psychological Biases that can Affect your Investment Strategy

3. Rakesh Jhunjhunwala Investment Strategy

4. Is it Good to do SIP in Stocks – 5 Benefits of SIP Investment

5. How to Achieve your Financial Goals by Investing Online?

Want to start investing in stocks online? Watch this video.