Managing Money Yourself


There is a simple decision that every investor must make at some point. The decision is whether or not to manage their own investments or let somebody do it for them. Whatever decision you make it is helpful to know some of the basic investment principles that help mitigate your risk and maximize your return.

Investing can be considered risky in any short-term view of the market. However, with a long term view the picture changes quite considerably. Thus, one of the first principles to understand is that time is always on your side. The longer you can stay invested in a diversified portfolio, the better off you will likely be. This applies to almost any market scenario. Considering even the Great Depression and the Bear Market in that period, the average investor would have been better off leaving his or her money invested as long as he could leave it invested over the entire course of the downturn.

Therefore, investment principle number one is the following:
#1 – Time is always on your side. This principle effectively says that you need to always be willing to leave your money in for a period of roughly 5 years minimum for equity investments and 2 – 3 years for other types of investments. Five years is no hard and fast rule but an estimation of how long it takes for any short-term downturn to begin moving up once again.

The next subject most people devote inordinate amounts of time to is selecting the actual investments. This is a worthy subject considering the vast variance you find in different financial investments. However, if you look at the statistical records you will find that even the most astute and lauded investment manager has failures or makes poor choices on a somewhat regular basis. Why is this the case? It is because the simple fact is none of us can predict the future. Regardless of how much we prepare or research we are still at the mercy of fate and an unpredictable world. Therefore, we need to accept this is an important factor in making investment decisions.

So what principles of investing can help us deal with the inherent unpredictability of the future? There are two that go far in mitigating against this risk. They are as follows:

#2 – Never put all your eggs in one basket. Because nobody can predict the future, we are always better off investing in a variety of investments that perform well under different market conditions. You simply should divide your investments according to risk and asset class and invest accordingly. This ensures you don’t put all your eggs in one basket, which is the big mistake people are most likely to make. They hear a friend tell them about this “can’t miss” stock opportunity and then they invest all their money only to see it quickly dissolve into nothing.

#3 – Never invest all of your money at once. When you invest in anything dollar-cost-average instead of investing one lump sum. This is the rule that helps you from paying too much for an investment. Sure, you may get a good deal and could be buying at an all time low but it is not likely. The odds are that the price will continue to fluctuate and thus it is usually better to dollar-cost average rather than invest all your money at once.

If you follow these simple rules you will keep yourself from making any big mistakes in managing your money yourself and just as with everything else time breeds knowledge so over time you will accumulate the knowledge necessary to go beyond these two simple rules.

 

Information is for educational  purposes only and is not be interpreted as financial advice. This does not represent a recommendation to buy, sell, or hold any security. Consult your financial advisor.

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