Golden Rules of stock investing

We win half the battle when we make up our minds. Stock Market Investment is both easy and challenging, but only informed investors can make money in the long term. Investors learn from their mistakes and their continued learning advance them into smart investors. The three critical success factors in Stock Market are discipline, patience and the ability to change perspective when the data start to change course.

Investing in the stock market requires knowledge of the markets, economy, and how different things come together and affect the market at various levels. So there is no one rule book for investing in the stock markets, but there are some "Golden Rules of stock investing" that one should keep in mind before investing. Some of those rules are described below.

• Avoid herd mentality

It is important to conduct your own research before investing in stocks to ensure you are making the right decision. Herd mentality is a phenomenon where investors follow the actions of the majority without making a proper company analysis. It can lead to a market boom or bust, but when the truth strikes the crowd, it can cause a domino effect. Investors who go against the crowd and trust analysts can make profits by understanding the market, thinking rationally, and being prepared against the market.

• Don’t try to time the market

A quote by John Maynard Keynes fits for explaining this lesson – “Markets can remain irrational longer than you can remain solvent. The time to sell or buy a security in the market is more beneficial and significant than timing the market. Investors should avoid trying to time the market, as it is a myth and can lead to more losses than gains. Investors at times regret and grumble that they waited too long to acquire or sell a certain asset. Often they wait for buying, thinking that the stock would fall more and react greedily that it would rise somewhat more. They miss the chance because of the struggle between greed and fear.

• Keep realistic expectation

Financial goals should be realistic and not based on unrealistic assumptions. Over-expecting from the stock market and underestimating risk can impact portfolio, capital invested, and future goals, so it is important to make realistic assumptions and set realistic expectations.

• Have a disciplined approach

Despite great bull runs, stock market volatility has caused investors to lose money, but those who invest systematically in the right stocks and held on to their investments patiently have seen outstanding returns. Investing in discipline is about developing good habits and sticking to them, therefore patience and a disciplined approach are required.

• Follow diversifying approach

Diversification is a risk management approach that involves investing in a variety of assets or securities to minimize a portfolio's overall risk. It is essential for wise investing since it reduces risks while investing for the long term and allows for a specific proportion of high-return investments. Diversification may be accomplished in a variety of methods, including investing in various asset classes, sectors and businesses, and geographies. It is critical to do research and maintain a well-balanced and diverse portfolio that is consistent with your investment objectives and risk tolerance.

• Keep some liquid assets with instant access

In the time of need this golden rule for stock investing is reminded by many investors. Investors should have a percentage of their portfolio that can be converted into cash quickly. Talking of good times, profitable trading opportunities arise for a relatively short period, and investors sometimes miss out on taking advantage of movement owing to a lack of funds. At that moment, cash component in portfolio comes handy.

• Don’t forget your charges

This reminds me of a very famous dialogue from the movie “Aamdani Atthani Kharcha Rupaiyaa’, which tries to convey that an investor should compute all the expenses either incurred or not while calculating his/her return on investment. Like time period, what that capital amount could have earned if put at another place for work, buying sealing charges, etc.

• Invest only the surplus funds

When investing for a longer period of time, it is vital to consider the liquidity and maturity period of the capital invested. An investor should only invest the amount of money that he or she can afford to lose or that he will not require for a particular period of time.

• Timely review of your investments

The investment follows the funda of Invest and Forget. But it doesn’t mean that an investor should forget about the investment rather he/she should monitor the asset's performance. Reviewing your investments is an essential part of managing your portfolio. It can help you ensure that your portfolio aligns with your investment goals when it’s time to rebalance the portfolio and ensure that your investments are still suitable for you.

• Buy when everyone is fearful

It is human physiology to avoid fallen stocks. Golden rules of stock investing by legendary investor Warren Buffett “BE GREEDY WHEN OTHERS ARE FEARFUL AND BE FEARFULL WHEN OTHER ARE GREEDY” strategy is a popular investing strategy that suggests that when the market experiences a downturn or correction, it may present an opportunity to buy stocks at a lower price. It requires careful analysis of the market and individual stocks, as well as a long-term investment horizon and risk tolerance.