5 Common Investment Rules You Should Be Following

Savage Villoch Law, PLLC
30
Apr
Investment advice comes from everywhere… even if you don’t ask for it.

Everybody thinks they’ve got “the answer” when it comes to investing and everybody wants to share their secret to success. That’s why you’ve likely been offered quite a few tidbits of investing advice from everyone from your cousin to your neighbor. The truth is (and you’ve probably realized) that most of these sources aren’t actually qualified to be giving investment advice.

While you should definitely take unsolicited investment advice with a grain of salt, there are some tried-and-true pillars of investment knowledge that you should keep in mind. These common investment rules can help you on your investment journey. Not only can they help you map out your investment goals, but they can help you plan and manage for the future. Keeping in mind these investment rules can help you maintain a focused investment strategy and avoid common pitfalls.

investment rulesHere are five common investment rules that you should always keep in mind:

Thinking about starting an investment? Do it now!

This should be one of the first investment rules you learn. The early bird gets the worm – or, higher returns. The sooner you start saving for an investment, the more time it will have to generate returns. It also means a more manageable investment plan. The law of compound interest means that the earlier you start saving, the less you will have to put away and the more you will accrue in interest.

Greater risk=greater reward… most of the time

It’s a classic and oft-repeated axiom in the investment world, but that doesn’t mean you should take it for gospel. Just because you take a big risk, does not mean you’re in for a greater reward. Sometimes, you simply just take on an unnecessarily greater risk. While there is a link between risk and return, it’s not always going to be a given. You may have heard that holding a riskier asset for a long-term will produce a greater reward in the end, but this is not the case all the time, particularly if you are starting from a place of high valuation.

Understand your fees: Investment plans with higher fees don’t mean better returns

In fact, they probably mean you’re losing out on potential earnings. According to this report from the Securities and Exchange Commission (SEC), you could be losing A LOT on your investment if you go with an investment service plan with higher fees. Think of investment fees in terms of exponential growth:

Let’s say you want to invest $10,000 over 20 years and you want 10% annual returns. You have the choice between two investment plans: one with 1.5% annual fees and one with 0.5% annual fees. If you go with the 1% fee plan, you actually stand to loose over $10,000 over those twenty years, as opposed to a plan with 0.5% fees. You can use the chart below to help you visualize the disparity in investment values after 20 years for portfolios with a 0.25%, 0.5% and 1%, respectively:

investment rules

A diversified portfolio is the key to a healthy portfolio

Taking this one step further… a globally diversified portfolio is key to a healthy portfolio. You never want to keep all of your eggs in one basket; why should you contain that basket to domestic markets? If you’re serious about a resilient investment portfolio, you need diversified assets in global markets.

Diversified does not mean hodge-podge

When some investors hear the term diversified portfolio, they take that to mean simply stocking their portfolio with different asset types. While this is true on a fundamental level, you need to employ some strategy in building a healthy, diversified portfolio. Tossing in random assets just to make your portfolio “diversified” can actually make it volatile and subject to increased risks. You can find out more tips on building a diversified portfolio here.

Don’t buy into hype… before investigating the hype

In the investment world there are always hot new trends, surrounded by hot new hype. Often, this hype results in an investment frenzy. This, in turn, results in investors throwing money blindly towards funds of which they have – at best – a vague understanding. If you catch wind of a hot investment trend on the rise, investigate before any capital committal.

Be cautious with niche market-investing

Typically, there’s a lot of hype surrounding niche markets. Niche markets represent the bold, innovative products that people want to be associated with. And, while it’s true that there is true investment potential in niche markets, you should exercise caution if you’re thinking about investing in a niche market investment opportunity. You can run into a lot of risks dealing with niche offerings; they’re often untested markets and they can form dangerous bubbles as investors scramble to cash in on the latest hype.

You can look at Bitcoin and other cryptocurrencies as a prime example of the issue with niche market investments. The Bitcoin-boom spawned one of the largest investor-frenzies of the past decade and spawned countless imitators, but now many worry the Bitcoin bubble is very close to bursting. The popularity and investor-appeal of Bitcoin snowballed and quickly grew beyond the expectations its creators – and beyond the control of regulators. Now the hulking behemoth that is Bitcoin is teetering on the verge of collapse and some investors may stand to lose out big.

Looking for more investment advice?

These investment rules of thumb are great to keep in mind as you build your portfolio, but they are by no means comprehensive. If you’re looking for in-depth resources for investment advice, news and tips, check out our blog! You can also visit the SEC website for their extensive archive of investor education materials.

Contact our team if you believe that you may have suffered a capital-loss at the hands of your stockbroker or financial adviser. We can help sort through your claim and discuss your options, including whether you can sue your stockbroker and if you are entitled to investment-loss recovery.

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