Do you know these financial rules of thumb?
For every investor that exists, there’s a unique blend of theories, strategies, and rules they follow. No two investors are the same since everyone has different goals, starting capital, knowledge, and appetite for risk. Still, there are a few pieces of financial knowledge that underpin all these varying strategies and scenarios, some more obvious than others.
In this article, we’ll be exploring some financial common sense that, regardless of your experience with investing, might not be so common.
The Importance of Financial Knowledge
Before we go deeper, a word on financial knowledge. Unfortunately, a lot of what’s considered financial common sense is rarely ever taught. Many schools don’t take the time to explain personal finance let alone investing strategy and what many people learn is passed down from their parents or trying to find their own way – for better or worse.
But understanding the ebb and flow of money and learning the fundamentals behind generating wealth is important for you to secure your financial future. While the rules we share here aren’t hard and fast, they provide good guidelines to help shape your strategies and withstand most, if not all, of what the market and all its uncertainty will throw at you.
With that out of the way, let’s explore some of the fundamental pieces of strategic financial thinking.
1. If Everyone’s Talking About a New Investment Opportunity, It’s Too Late
Every so often, some stock or cryptocurrency makes headlines and it seems like everyone’s rushing to buy some. In recent years, the GameStop short squeeze and “dogecoin millionaires” who rake in fortunes from trading cryptocurrency are examples of people who’ve gotten rich off of market volatility in a relatively short amount of time. However, if people who generally don’t invest are suddenly buying up certain stocks, cryptocurrencies, or other investments, it’s already too late.
Whenever there’s some big market trend, the people who’ve already made a lot of money did so before it became news. If you look at long-term share value data, there are plenty of cycles where prices will go up, become news, and then crash just as suddenly. Mind you, this isn’t new behavior either. The Dutch tulip mania of the 1630s overinflated the value of tulips where a single bulb of a variety called the Viceroy was worth over 10 times a tradesperson’s annual salary – and this is but one historic example.
The rule of thumb here is that if you’re hearing about it from people otherwise uninformed about investment or a specific industry, chances are it’s too late to make a good financial move on that advice.
2. Diversify, but Emphasize
It’s good practice to spread out your investments. After all, putting all your eggs in one basket is very risky if the basket starts to shake. However, spreading your portfolio out too much can cause your investments to grow very slowly, if at all.
Instead, put some emphasis on the industries or trends you understand well, just like it’s a smart call to start investing in areas you understand. For instance, a mechanic that understands cars and cyclical buying behaviors (perhaps more people buy cars in the summer than the winter) will know how to read the auto industry better than, say, paper milling or the latest video game company that went public.
In other words, you can find balance between risk and growth by spreading your portfolio out and picking an industry or two you understand well to act as a focal point to build the rest of your strategy around.
3. Keep an Eye on Fees and Taxes
Like any kind of banking, investing comes with its own set of fees, not to mention taxes. With that in mind, it’s important to note taxes, trading costs, and management fees that can easily eat away at your gains. For instance, if you buy a stock for $10 and the brokerage charges $5 per trade, you’ll need that stock to double its value to $20 just to break even. Moreover, tax laws regarding capital gains may change over time, affecting how much profit you truly have left over depending on how much money you made and how long you held the stock (i.e. if it was a short- or long-term play).
Be sure to do your research and shop around for trading platforms that provide great service with minimal fees. While there’s not much you can do about taxes, leveraging money into tax-advantaged strategies is one way to become as tax-efficient as possible.
4. You Can’t Time the Market
If you’re looking to get into investing, the best time to start trading is today – regardless of what the market’s doing. There are always opportunities to take advantage of, no matter if it’s a bull or bear market. Instead of trying to time the market, hoping something happens (which may never come to pass), focus on what the market’s doing today. It’s better to project and get an understanding based on current trends and ask yourself if what you’re buying will still be valuable and relevant five years from now.
Unless you’re a day trader, it pays to keep focused on the big picture. The idea of “buy low, sell high” is reliant on the passage of time, so it’s best to frame your choices around how much value you think a stock will have from when you purchase it to when you aim to sell it. But that leads us to our next point…
5. Historic Performance Doesn’t Indicate Future Performance
The market can be as wild as the faith and confidence traders have in it. Just because an investment performed well in the past, that doesn’t mean it’ll continue performing well in the future. Much like timing the market, not understanding how to read market trends can have you lose a lot of money very quickly.
Instead, use historic performance to determine risk, asking yourself if the current rate of growth is sustainable over the next few years, especially if you’re trying to buy at a historic high. Moreover, if you’re trying to buy a dip, research why the price is down and consider the likelihood of recovery during the window you’re trying to trade in, whether that’s months or years.
Still, every investor has a different method for reading and interpreting strategies from charts. Just know that the future is uncertain; the chart can be a good starting point but we ultimately have no idea where a stock price might land.
6. Rebalance Your Portfolio Regularly
The world and its markets are in a constant state of flux. Investment – whether for retirement or otherwise – is the art of learning how to ride the financial waves. With that in mind, take time to rebalance your portfolio on a quarterly or semi-annual basis, adjusting to mitigate risk and maximize returns. In the case of retirement, make sure to also factor in life expectancy and inflation to avoid outliving your money.
Plan Wisely with Smart Life Financial
Part of the fun of investing is the randomness of it all. But trying to make decisions that can make or break your financial stability into the future can be stressful and ought to be treated with the respect and caution they deserve. That’s why financial knowledge is so important – the more you know, the better decisions you can make.
If you’re interested in learning more, reach out to the helpful experts at Smart Life Financial today. Whether you’re new to investing or a veteran trader looking for better ways to plan out your retirement portfolio, we have strategies to fit any budget, any goal, and at any stage of life.
