Warren Buffet once said, you only find out who is swimming naked when the tide goes out. What the
investing guru meant by this is, it is only during a weak economic environment that the
real investors succeed. When the environment is good, it’s easy to neglect all caution.
During this time, almost all investment options do well and investors take home positive returns.
However, during an economic turmoil, is when investors really see the need of applying the core
principles of investing. These principles are so important but only the few elite know about them.
And never has it been a better time to learn how to invest like now. Several parts of the
economy have been tanking with after-effects of the pandemic and uncertainty due to a possible
world war, but still some rich people have made more money than ever. And how did they do it?
Today here on practical wisdom,
we are going to share with you ten principles that will get you investing like the rich.
So make sure you grab a pen and paper and watch till the end. So, before we begin,
give this video a like and welcome and subscribe if you are new here. Now let’s begin, shall we?
15 - Have a personal financial roadmap
The very first principle is to understand your financial situation in totality. This is
especially important if you have never created a financial plan before. You need to evaluate
your current financial position, determine your risk tolerance and establish your goals.
Whether you are doing this with a professional or by yourself,
this is the initial step that you have to start from. As you do this, there’s one very important
aspect that you always must keep in mind, that is honesty. As cliché as that sounds,
you need to be as transparent as you can, the truth is its not guaranteed that you will make
the money back, but if you get your roadmap well drafted then chances are, you’ll make money.
14 Invest Early It has been proven that investing early is
more effective than waiting to have a lump sum to invest with. Start with what you have and slowly
build your portfolio. By investing early, you will take advantage of the power of compounding.
If you didn’t know, compounding is simply using up the money you have earned, to make more money.
So, you will not only earn from what you have invested, but that accumulated capital gains
interest and dividends that you have earned. A two-year difference in investing could translate
in thousands of dollars potentially lost. 13 Diversification
The art of diversification is what most wealth managers and successful investors have mastered.
Never put all your eggs in one basket, is a good principle to follow. While that may seem like
common sense, you’ll be surprised at how common sense isn’t common when it comes to investing.
Diversification is actually quite simple. It means you pick a couple of investments
instead of just one. By having a group of investments, you lower the risk.
Look at this scenario, if you invest in one company, then the company goes bankrupt,
depending on your share type, you stand to lose a lot of money.
As you diversify, ensure you select a wide scope of investments.
Different asset categories throughout history have never moved up and down at the same time.
This means when stocks go down, chances are bonds are still up or have gone down but never at the
same exact rate. But by having a portfolio, you are guaranteed that your losses are limited.
12 Leverage is key in building wealth Get leverage to build substantial wealth.
You are only limited to what you have and if you want to build massive wealth,
you will have to seek some leverage. Leverage comes in multiple forms. Financial leverage
is the use of other people’s finances to increase the pool of available funds to build more wealth.
Time leverage is consumption of other people’s available time since you only have 24 hours in
a day, but in actual fact it’s more like about sixteen since the rest you’re probably asleep.
Knowledge leverage is the use of other people’s expertise since you don’t know everything,
and someone out there knows more about investing than you do. Systems and technology leverage,
refers to use of other people’s established systems that are more effective and efficient.
11 Be vigilant of fraud There are fraudsters everywhere,
and scam artists are always looking for their next target - Don’t be one. Most of the time,
these fraudsters use highly publicized news items to lure investors. The opportunity they
provide is often too good to be true. To avoid falling victim to such, ask as many questions
and request for official documents. Also, involve a lawyer to evaluate entities before investing.
10 Cash is the King If anything,
the pandemic has really shown us the importance of a cash reserve.
Before making any financial plan, ensure you have a cash reserve.
The reserve should be between three to six months’ worth of expenses. Start by listing down your list
of expenses and the amounts, so you know exactly how much you spend every month. The people that
had reserves when the pandemic first hit was probably not so affected by the economic turmoil.
The reserves enabled them to sail through the turbulent waters completely untouched.
We have no control over economic changes, but we do have control over our emergency funds.
Ensure you have the cash stacked somewhere safe just in case of any unprecedented change.
9 Deadly Debt
Advisors point out that debt is both good and bad. Well, it has both positives and
negatives. Debt is great when you’re using the money for investing and not to cover expenses.
In fact, most high net worth individuals increase their money through debt. But,
the reality is the people in the best financial shape are those who are completely debt-free. Even
sophisticated investors and business men get into trouble if their debt loads aren’t well-monitored.
By taking debt you are obligated to constantly make the repayments according to the agreements
and ensure you meet all timelines. Anything could happen which could hinder your ability
to make the repayments in a timely manner. We are not entirely against debt, if you have to,
take it, but only for investment purposes and not to cover personal expenses.
Also, if you really have to take on debt, create a plan to get rid of it as soon as possible.
It’s not always guaranteed that your income streams will sustain loan repayments.
A great example is the Russia - Ukraine war, citizens within those regions who have debt
are still obligated to complete their repayments regardless of the current situation. Despite most
of them losing jobs and migrating into other regions they still have to pay their loans.
8 Timeframe is Key It is important to
understand your time horizon before building an investment portfolio.
By understanding this, you are able to keep turbulent market conditions in perspective.
For example, a long-term investor is not afraid of the bear market. In fact, it provides a
great opportunity to trade at discounted rates and make good returns after a given
period of time. See how understanding your time limits helps you draft a great investment plan.
It is very irresponsible to build a portfolio without establishing when you will need the money.
7 Dollar-cost averaging This refers to the process of periodically adding
cash into investments at specified intervals. This could be once a month or a week based on
your ability. Some people are emotional about sports, others politics, the climate, and so on.
So, it’s only reasonable to be emotional about your investments. However, the truth is,
emotionally-based decisions almost never work well in the world of investing. However, by setting up
an automated investment plan into your accounts, this eliminates emotions from the whole process,
it reduces the desire to time markets, and enables one to build wealth gradually over time.
6 - Rebalance to make money Rebalancing is based on the theory,
‘buy low and sell high’. It involves adjusting the weights of the assets within a portfolio to take
advantage of the changes. This practice allows you to sell positions that increased in value
and simultaneously buy the positions that went down. This enables maintenance of the
original asset allocation in line with the portfolio holder’s risk tolerance.
5 Conservative bonds are a safe haven When the markets are soaring,
many investors don’t pay attention to quality fixed income sources. Everyone is rushing to
get the high soaring technology stocks. And, it’s ok, there’s nothing wrong with that. But reality
is most of the time when the market is doing really well, turbulence often comes in. Yes,
you will make some returns but for how long before there’s a downturn. Here is where bonds come in.
Bonds serve a crucial purpose in portfolios. They provide a cushion for turbulent markets
by allowing investors to withdraw from an asset that didn’t plummet in value.
And dismissing bonds as a core investment strategy is being short-sighted.
4 Returns and risk go hand in hand Every investor out there is thoroughly
searching for that highest return option with the least risk. Finding the balance is the hard
part since the higher the returns promised, the higher the risk of losing the investment. Risk
could come in many ways. It could be illiquidity, poor credit or leverage. Illiquidity refers to the
inability to convert an asset into cash fast. Economic conditions are also very turbulent
and play one of the key roles in determining the amount of return.
So as you invest, always keep an eye open, every lucrative opportunity has a high level of risk.
3 Boring always beats exciting
Human beings love exciting things, they tend to go for the next best thing in the market.
However, there’s a thin line between an exciting opportunity and a viable opportunity.
And most people don’t see it. You will find most investors confuse an exciting idea for a
good investment option. This excitement is often packages in the latest fad, a new business model
that will change the way of doing business, the latest technology or even an exclusive deal.
Instead of focusing on the fundamentals, most focus on the hype. Remember what we said earlier
on mixing emotions with investment decisions, I hope you now understand the point better.
To avoid being lured like a child with candy, stick to the boring typical investments. This
could be index funds, blue-chip stocks or even high-grade bonds.
You might miss out on the next hot IPO, but you definitely won’t miss out on stable returns.
2 Keep an eye on fees and taxes Brokers charge fees on every trade
made. The average is between 2 - 5% in fees for every sell or buy transaction.
The commissions between brokers vary, so ensue you evaluate them before making your decision.
Also, tax on capital gains can reduce your overall returns. Before investing evaluate
the regulations within your jurisdiction to find out what taxes are due on your gains.
1 Move on from the stock markets once you win The stock market is addictive. Many people like to
compare it with gambling. Once you make some good money, you will always want to make more. However,
once you have made a significant amount of money from the stock market, it’s a good idea to exit
to avoid severe market downturns and the stress that comes with waiting out through bear markets.
You see, you can always seek other investment opportunities,
with stable returns despite them not being as lucrative in returns as the stock market.
Thank you for watching. If you’re still here I bet you have enjoyed the video.
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investing principle that you’ve learnt today. Have a great day!