In 2020, the US fell into the fastest bear market in history, with March being the most volatile month the S&P has ever experienced. The mandatory shutdowns induced by the Coronavirus pandemic sped up evolutionary business, economic, social, and institutional trends. However, the bust will be dramatic and filled with opportunity, so investors should avoid expecting a return to normal when businesses resume.
The thing is, most beginner investors believe there is some mysterious secret the veterans are keeping from them. When investing in the stock market, it’s not secrets that make winners, well winners, but the investment principles they follow. The trick here is not to be emotional and greedy when you invest, because those two always lead to major losses, which is why most investors give up.
So, what investment principles are these? In this post, we’ll guide you through some of the most effective stock market investment principles.
1. Understand the Kind of Investor You Are
When investing in the stock market, it’s crucial for you to first understand the kind of investor you are. There are several distinct groups of investors in the stock market, like active and passive investors. The former are the enterprising investors, while the latter are defensive investors.
These two investment options are quite different. If you decide to be an active investor, you need to make a serious commitment to being an investor and give it your time and energy. Your amount of research and dedication will equate to the amount of returns you get. If you decide to be a passive investor, you don’t need to work as hard or invest as much time, but the returns are likely to be lower.
Beyond this, decide whether you’re a speculator or an investor. You see, investors look at the stock as a whole business, and hence, as a shareholder of the business. The speculator, on the other hand, only views the stocks as a commodity they can buy and sell whenever they want and have no regard for the business whatsoever.
2. Expect Volatility and Aim to Benefit from It
As a stock investor, if there’s one thing you should understand about the market is that it’s absolutely volatile. The trick here is not to run away from the market when shit hits the fan. You see, when the market sinks, it’s an incredible opportunity for an investor, because this is the ultimate time for you to buy.
Avoid letting the market dictate your emotions and lead you to bad investment decisions. This means that instead of fearing volatility and viewing it as an enemy to run away from, you should take advantage and profit from it. To mitigate the negative effect of volatility, you can use two strategies, which are dollar-cost averaging and investing in both stocks and bonds.
Dollar-cost averaging involves purchasing investments of equal dollar amounts at regular intervals. This investment principle takes advantage of price dips, and you won’t have to worry about your position at the top of the stock market. This is a good strategy should you choose to be a passive investor.
3. Invest With a Margin of Safety at All Times
Every investor wants to minimize the downsides of risks and get high return opportunities. One of the most effective investment principles to achieve this goal is to invest with a margin of safety. The margin of safety involves buying a security at a discount to its intrinsic value.
Value investing can make you tons of money when the market re-evaluates the stock and drives up the prices. Purchasing undervalued stocks is an excellent strategy because when they go back to their fair price, you’ll profit immensely. Maintain the margin of safety, and you’ll be okay.
4. Don’t Follow the Herd
If you watch the stock market, you may have seen short-term market behavior and the herd mentality is so obvious. You’d be surprised at the number of people that follow each other above stiff mountains, and rocky cliffs for the simple reason that it’s what everyone is doing. If you follow people blindly and do what they’re doing, you’re abandoning your own strategies, and you’re bound to lose money.
The problem here is fear, and people are programmed to make decisions when they’re afraid or stressed. Most of the time, decisions made in this state are usually the wrong ones. You need to make a conscious effort to avoid this mistake and learn from the warren buffett network, to be fearful when others are greedy, and be greedy when others are fearful.
5. Diversify Your Investments
Diversification is the secret to successful investing and not just in the stock market. Diversifying means you’ll lower the risk of losing money substantially, and increase potential returns. One of the best investment principles you can implement is finding a sweet spot between optimizing both risk and returns.
6. Don’t Lose Track of Your Investments
One mistake that most investors inevitably make is to invest in a vacuum. At one point, you may stop learning, researching, adjusting your investment strategies, and keeping in touch with the market and economic conditions, which will be a grave mistake. The thing is, if you do this, you will learn a very painful lesson.
How will you improve your strategies and grow your wealth when you no longer seek out new information? When you realize that your investments are doing well and stop following the market and economics, you’ll lose touch with your investments. By the time you realize this mistake, it’ll be too late, and you’ll have to start all over again.
Apart from sharpening your knowledge from the information you find online, it’s also advisable to talk to people. Talk to knowledgeable investors, and you’ll not only learn about what’s happening in the market, but you’ll get an opportunity to absorb their wisdom and knowledge.
7. Keep It Simple
The information you learn when you start investing can be utterly overwhelming. Investing doesn’t have to be complicated or sophisticated either so try to keep it as simple as you can. Try investing in what you know and understand, which will make things simpler. If you want to invest in something you don’t know, learn as much about it as possible before you start.
The Most Effective Investment Principles
What do you think of these investment principles? If you implement them in your stock market strategy, you’re likely to have an easier time winning and growing your wealth. If all this seems too hard, you can always hire a pro to help you out.
However, you can go at it a lot, and you’ll find that our website has vast knowledge and a plethora of posts about investing in the stock market. Check us out today.