As the sharemarket rollercoaster continues, it’s worth just taking a deep breath and reviewing the golden rules of investing.
Let’s be honest, there’s no true formula for finding success in the sharemarket. There are so many factors at play, not least of which is your own investment personality. How much risk are you comfortable with? Are you a hands-on or hands-off investor? Do you have ethical considerations? Are you conservative or creative? What are your savings objectives?
You can then add all the external factors that influence the market, such as interest rates, exchange rates, government policies, overseas financial markets… It’s little wonder why making money in equities isn’t easy.
I reckon it’s always a good time for a refresher course on the golden rules of investing. No matter how involved you are in the sharemarket, so often we forget the basics.
Keep in mind, these rules aren’t rigid. You will definitely need to adjust them from time to time. 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 set of golden rules of investing as a guide.
Kochie’s 13 golden rules of investing
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 with an overall investment strategy – for example, 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. Hang in there.
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; when it’s 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.