The 6 Rules of Investing are:
- Avoid significant loss at all cost
- Dividend is king
- Diversify
- Control your emotion
- Review regularly
- Have some cash available
Let’s elaborate a bit.
1. Avoid significant loss at all cost
What does this mean? Aren’t we in the market to earn money? Why is there loss? Okay, the truth is this: In your investment journey, there won’t be all sunshine and cupcakes. No matter how much effort we put in, there will be times that the stock does not turn out as we want it to be. Maybe our research is wrong, maybe the economic situation is not encouraging or any other reason. In this case, we must be realistic and cut loss. Thus, before you invest, you should set a cut loss price for the share (there is no hard and fast rule, it is all up to you. If after evaluating it rationally and you find that the instrument is still attractive, you may even average down. Nonetheless, only do this if you are really confident). And you must be disciplined enough to execute it. After all, if it continues to deteriorate, you will lose most of your money. The most important thing that we want to achieve is to have more gains than losses.
2. Dividend is king
Since I am a long-term investor, I place high importance on dividend. It represents an extra cash flow for me. Who doesn’t like to get free cash occasionally? We can use the money to invest further or use it to pamper ourselves. After all, we have earned this.
3. Diversify
Diversification is meant to decrease risk. I think the optimal number of holdings will be around 10 to 20. Too little might still expose us to high risk while too many might dilute our earnings.
4. Control your emotion
If we are emotional, this state will affect our judgement. Do not internalize your holdings. It is not a marriage anyway.
5. Review regularly
Once you embark on this journey, remember to review your holdings at regular intervals. If not, you are doing a disservice to yourself. It is like driving without looking at the rear-view mirror.
6. Keep some cash on hand
I personally will keep some cash available for time of emergency. Besides that, when a great opportunity arises, you will have the money to seize it.
These are my rules of investing. These rules are developed from my investing voyage and were edited a few times throughout the years. You should set your own rules too. Remember these rules can evolve whenever you find some better ones. But once you set the rules, do follow them strictly.