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Investment tips: 13 golden rules of share investing

- August 23, 2019 3 MIN READ

What a wild couple of weeks it has been on global share markets. From investors spooked by everything from the China/US trade dispute and Central Bank interest movements to inverted yield curves and currency wars. I reckon it’s a good time for a refresher course on the golden rules of share investing. No matter how involved you are in the share market, so often we forget the basics.

They are not rigid because, of course, there may be a need to slightly adjust them from time to time. But let common sense guide you when that becomes necessary.

The share market is really a great mixture of human emotions, hopes, fears, greed, enthusiasm, stupidity and sometimes, even wisdom. So you can see the benefits of having a basic set of principles as a guide.

Here are some tips to keep in mind when you’re planning to invest:

1. Do your homework before buying.

Don’t buy…or sell…on rumour, hunch or impulse. Get hold of broker reports and the company’s last annual report, read the financial press and of course talk to your adviser. Buy shares that fit in with an investment strategy, e.g. for income, growth or both.

2. Balance the risk and reward factors.

If what you read and hear suggests that the share has more chance of falling in price than rising, don’t buy. Look closely at past performance and future prospects. Remember the sleep test. If the worry of your shares falling keeps you awake at night, don’t buy them. Unless you’re a speculator (i.e. gambler), be satisfied with steady progress.

3. Keep checking after you’ve bought.

Investment conditions can change, company management can change, the company’s objectives can change. Review shareholdings at least once every six months in consultation with your broker or adviser.

4. Exercise patience.

Don’t expect to become wealthy overnight. Most shares will need at least a year to show some reasonable appreciation.

5. Don’t forget shares can bring income and capital appreciation. 

We often ignore the impact of dividends. Estimate both these factors and relate them to your personal tax situation.

6. Be alert to trends.

In your daily reading, try to put the news through an investment filter. Political, economic, scientific events may have implications for some companies. If you get any ideas, check them out further and talk to your broker. Being ahead of the herd can mean nice profits.

7. Be prepared for unexpected events.

If the event concerns any of your shares, don’t panic. Review the situation promptly before taking any action. For instance, a sudden drop in a share price may well mean an institutional investor has sold a large parcel, and the price may rebound within a day or two.

8. Don’t try to back every horse in the race.

It is far better to hold a smaller portfolio of shares which you know well and are comfortable with than to invest in a larger number of companies in the hope of picking more winners.

9. Timing can be important.

If the share you want is being actively traded, buy at “market price” which is an order to the broker to get the best price possible. With shares that are beginning to attract interest, you can sometimes save money by waiting for a brief price dip.

10. Take a loss quickly.

Don’t let pride or stubbornness prevent you from accepting a mistake and correcting it. One big profit makes up for a lot of little losses. So keep them small.

11. Keep an eye on the ex-dividend date.

When a company declares a dividend, all shareholders on the books at that date receive the dividend, and usually the price of the shares will drop by approximately the same amount. Sometimes, the price of the stock will move back up within a day or two. Naturally if you buy on the date it’s announced, you won’t receive the dividend.

12. Follow the market.

Don’t try to beat the trend. In bear markets, be cautious; in a fluctuating market, think twice; in bull markets, take greater risks.

13. Take profits.

It is better to make a little less profit by selling too soon than to take the greater risk of overstaying the market in a stock which is overpriced.

If you have any more concerns on share investing, connect with me during my weekly Facebook Live session every Tuesday at 1.30pm and I will answer all your questions.