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Highlights
- Generating optimum returns over a long haul, while keeping the risk in check is the whole essence of successful investing.
- Diversifying your portfolio is a wise move as it reduces the concentrated risk of one asset class or sector.
- One of the biggest mistakes investors make is not cutting their losses short.
Choosing the right investment strategy along with the right mindset is very essential to success in ones’ financial journey. Generating optimum returns over a long haul, while keeping the risk in check is the whole essence of successful investing.
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Although there are no hard and fast rules to investing as each investor has his/her own investment philosophy, understanding, time horizon, risk appetite, etc., there are a few rules which all can abide by. Let us have a look at three thumb rules for investing that can help you survive crashes, capitalise on rallies and mange risks.
Read More: Acing the investment game through intelligent algorithms and ethical investing with Jaaims
- Never go ‘all in’
There might be instances when you would find yourself feeling very confident about the next move, raring to bet every penny on the same. Also, there is no dearth of claims of sure shot recommendations by “market experts” on business channels/magazines. However, you have to get it straight that no one can predict the markets, and anything can happen anytime.
No matter how better the analysis is, there are countless factors that are not in our control and can affect share prices. Also, having some spare cash on the side lets investors capitalise on corrections or dips as and when they arise.
- Diversify
Diversification refers to spreading your investments across different asset classes. This helps to manage the risk and reduce the drawdowns significantly. The simple premise of diversification is a few sectors or asset classes might go down at the same time but the possibility of all of them falling at the same time is highly unlikely.
In simple words, diversification reduces the concentrated risk of one asset class or sector on the entire portfolio. As Warren Buffett puts it in the best way, “never put all your eggs in one basket”.
- Cut your losses short
One of the biggest mistakes investors make is not cutting their losses short. While investing, there could only be four outcomes - a big profit, a small profit, a big loss and a small loss. Once investors are able to take care of their big losses, they can save their portfolios from catastrophic losses, which generally put investors a few years back on their investment journey.
One of the best ways to cut your losses short is by putting a predetermined stop loss. This will automatically exit the position once the price of the security drops below the stop loss level.
Highlights
Investing is not as complicated as investors think. Following very simple rules as mentioned above can help investors achieve their investment goals with a relatively lower drawdown. Despite these generic thumb rules, it is always advisable for investors to start their investing journey with a decent level of fundamental knowledge.
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