Five Investing Principles that Every Investor Should Know

So, you’ve decided to invest in the stock market—great!

You may be feeling a lot of emotions right now: excitement at the prospect of earning money, confusion at the number of options available, and fear that you may make a costly mistake. You may be looking at successful investors and traders and wondering what their secret is.

The truth is simple: there is no secret. There is no magic technique that will guarantee you great profits.

Investing is not about guarantees—it’s about finding the balance between making a profit and lowering the risk of loss, so that you can invest successfully.

Here are some important investing principles that will help you find that balance so you can successfully invest:

1. Start by setting your goals

Your specific needs will determine where your balance lies. Are you trying to earn money for something you’ll need soon? Are you getting an early start on a nest egg for your retirement? Or are you saving up for a trip a few years from now?

Knowing your goals will help determine the investment strategy that’s right for you. It will also help you measure your progress and evaluate whether your investment portfolio is still on the right track.

2. Decide based on facts

Investing is all about managing your risks.

When you invest or trade based on emotion, hearsay, or hype, you’re doing yourself a disservice by taking on risk that’s both unnecessary and dangerous.

No matter how exciting a stock can be, at the end of the day, it’s still a piece of ownership in an actual corporation with an underlying business that can be evaluated and with earnings that can be measured.

To make the right investing calls, you have to base your decision on facts coming from trusted sources.

3. Determine the risk you’re willing to take

Risk is about the potential for bad consequences. It’s important that you not only decide what counts as a “bad” consequence for you, but you need to also know what your risk tolerance is.

Simply put, you should never risk more than you are comfortable with, even if that means missing out on the potential for great opportunities.

While there are investment products that can give you high returns over time, like stocks for example, their short-term volatility might not be for everyone. It’s also possible that even though you’re comfortable seeing some ups and downs in your investment portfolio, it might not be worth it to put them in the riskier products especially if you’re going to need that money in the next year or so.

At the end of the day, investments have different risks, and you should know what they are and make sure that you’re comfortable with the level of risk you are taking.

4. Protect your portfolio through diversification

One way to make sure you don’t lose more than you’re willing to is by spreading your investments across different asset classes (bonds, stocks, preferred shares, REITs) and even within those asset classes (having stocks in different industries).

Each different class or type of investment will have their own strengths and weaknesses, as well as their own risks and catalysts. By having a diversified portfolio, any losses may be mitigated by gains in other investments.

The simplest way to diversify your portfolio is by taking advantage of mutual funds, which are professionally-managed products invested in money market instruments, bonds, stocks, or a combination of these.

Depending on the mutual fund you invest in, even just one fund will give you diversification since they have different investments within them (e.g. different stocks inside an equity fund, different short-term instruments inside one money market fund).

5. Remember that conditions change

Change is constant, whether we’re talking about markets, businesses, or your own financial circumstances.

Even if you could create the perfect investment portfolio for yourself at a given moment in time, that perfection is limited to just that moment because of how quickly things can change.

This is why it’s important to regularly assess the market, your investments, and your finances so you can decide whether you should hold steady or make some changes to your investments. By doing so, you won’t be exposing yourself to more risk than you’re prepared for.

These investment principles have served me well in my decades of investing, and I hope that they will also guide you through your own successful investing journey.