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Investing can be tricky at times; therefore, it is important to know what you are doing before diving in. For, risk comes from not knowing what you are doing. In addition, the investing landscape is constantly evolving, and it is important to be updated on the do’s and don’ts of investing.
The Covid-19 pandemic has dramatically impacted the global economy, leading to a shift in how investors invest their money. There is now more focus on digital investments, as well as more emphasis on Environmental, Social, Governance (ESG) investing. There is also an increased focus on diversification as investors look to spread their risk across multiple asset classes.
That said, here are five rules for investing that may help you make informed investment decisions:
Investing Rule #1: Diversify Your Portfolio
Owning various assets with varying performance over time is known as diversification, and it is one of the most popular strategies to protect any investment against economic downturns.
But, volatility is the name of the game. The investment environment is very volatile for Indian markets. Hence, diversifying your portfolio is one of the most important investing rules you must know. By diversifying your investments, you will be able to spread your risk across multiple asset classes, such as stocks, bonds, and commodities among other. This will help protect your investments from the volatility of any one asset class.
You should also diversify across different countries, industries, and strategies to further reduce your risk.
However, you should be aware that while diversification lowers asset-specific risk, or the risk of owning an excessive amount of a single asset class, such as stocks in general, it does not completely eliminate market risk, which is a measure of all the factors influencing the performance of financial markets.
Investing Rule #2: Do Your Research
Past performance isn't always indicative of future success; it's sometimes just a testament to what used to be. Quality and heritage are important, however. Therefore, before you invest, it’s essential to research the company or asset you are considering investing in. You can examine the company's financial information, including its financial statements, its potential for growth, the quality of its management, and current market and economic trends.
Additionally, you should also examine the numerous investing options. You will need to comprehend, for instance, the variations among stocks, bonds, mutual funds, ETFs, and other investment avenues. Doing your research will help you make the most of your investments and ensure that you invest in the right products for your needs.
Investing Rule #3: Adopt a Long-Term Perspective
In the short term, even the best can underperform. It's critical to keep in mind that investing is a long-term endeavour. You should be looking to invest for the long-term, not for quick profits. This will assist you in resisting the need to make snap judgements based on transient market movements.
Additionally, remember that investing is a marathon, not a sprint. You should be focusing on building a portfolio of investments that will create long-term wealth. This means focusing on investments with long-term potential. Build your belief on thorough research; if you have done that, hold onto it despite the inevitable volatility.
Investing Rule #4: Don’t Make Emotional Decisions
It is often said that even the best-chosen investment could fail. Remember that investing can be an emotional roller coaster with highs and lows. For, money is always an emotional subject, but often when our emotions get involved with our investments, we may make wrong decisions. Emotions can lead to knee-jerk reactions instead of thoughtful decisions that align with your investment strategy. Hence, it’s important to remain level-headed while investing. You should focus on the long-term and remember that losses are a part of investing.
It is also important to remember that the future cannot be predicted. Therefore, you should base your decisions on data and research rather than emotion. You will be better equipped to make informed decisions and maximize your returns if you focus on the facts rather than emotions.
Investing Rule #5: Have an Exit Strategy
The most emotional topic an investor will face while building a portfolio and the hardest decision to make is when and how to exit the markets. An exit strategy is a plan of action you can take if your investments start to go south. Therefore, it’s crucial to have an exit strategy in place right at the beginning of your investment journey to protect your investments in case the market turns against you.
Your exit strategy should include a plan of action for when to cut your losses and when to sell your investments. It should also include a plan for reinvesting any profits you make. Having an exit strategy in place will help you make the most of your investments and protect your capital.
As we all know, investing can be a great way to build wealth. But first, you must understand the fundamentals of investing. Hence, knowing and following these rules can help you make more informed decisions. By taking the time to research, diversifying your portfolio and having an exit strategy, you will be well on your way to becoming an informed and responsible investor.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
The information in this document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipients of this material should rely on their investigations and take their own professional advice.