Every investor should adhere to certain principles of investment. It makes no difference what kind of investor you are, what your goals are, or how much exposure you have. There are tried-and-true guidelines that, if followed by any investor, will result in wealth creation in the stock market. However, success in the market goes beyond understanding and recognizing basic terms.
We can compare building wealth in the stock market to a marathon where only competitors who thoroughly comprehend and constantly follow the rules win, in this post, tried-and-true guidelines. You can rest assured that following these tried-and-true guidelines will put your investment journey on the right track because they have stood the test of time and continue to be effective today. So, shall we get started?
- When Investing, Keep a Safety Margin
The margin of safety investing tenet states that an investor only purchases securities when the market price is significantly below the value of those securities. The difference between the current price and your estimation of a security’s intrinsic value is, in other words, the margin of safety. Purchasing assets when there is this discrepancy allows investors to set a margin of safety based on their risk tolerance, minimizing downside risk on the investment. So that you can make a sizable profit on your next purchase, acquire stocks at a discount to their true value.
- Follow your Investment Strategy
Without a plan, no one can achieve their goals. Investments are subject to the same rule. Create an investment strategy that meets your objectives. The idea of sticking to your plan is one that all investors should follow. This investment strategy would make it easier for investors to decide whether to enter, enter, or exit a trade without letting their feelings rule.
We must realize that patience is necessary for success in the stock market. You need a solid strategy in both cases if you want to succeed. And no one strategy works for everyone. To create the greatest strategy in sports, you must be aware of your teammates’ and yourself’ strengths and weaknesses.
Your investments are no different. You must be able to stay focused and resist becoming sidetracked by gimmicks, as well as know how much risk you can handle and how long you can commit to the plan.
You need straightforward, long-lasting techniques if you want to give yourself a chance to succeed in investing.
Knowing why you are investing will help you create a sound investment strategy. In addition, knowing your goal makes it simpler to determine which options are most likely to get you there. You may create a sound investing plan based on your goals by asking yourself the five questions below.
- What’s the point of my investments?
- How much am I prepared to put in?
- By when will I require the funds?
- Where should I invest?
- How risky should I be?
The key is to stay on course and think about the future, regardless of market trends.
- Don’t Ever Go With the Flow
Most investors have lost money by not fully adhering to this investment plan. Most investors give in to what the crowd says without considering the fundamentals of buying a good stock before investing.
You will experience the same outcomes as other investors if you purchase the same securities they do.
Unless you take a unique approach, it is impossible to create a better performance. The greatest fortitude is required to buy when others are dejectedly selling and to sell when others are excitedly buying.
Investors focus on outlook and trends far too much. Therefore, emphasizing value results in greater financial gain.
The only way to find a stock deal is to purchase what most investors are dumping.
The market serves you when you need it, not to instruct you. Therefore, don’t let the market dictate when and how to sell your stock based solely on market trends.
Adapt Your Portfolio to Your Risk Tolerance
Developing an investment portfolio is like losing money on the stock market without considering your risk tolerance. Several factors, including age, investment knowledge, and investor style, can determine your level of risk tolerance.
So, if having a successful investment portfolio is your aim, you must consider your risk tolerance.
Your level of risk tolerance influences the type of investor you are. For example, which type of investor are you a conservative, moderate, or aggressive?
Conservative Investor
These are investors who are not very tolerant of risk. They aren’t willing to take chances. This kind will impact the assets in your portfolio, such as mutual funds.
Moderate Investor
This type of investor can tolerate some stock market turbulence while giving the market investor time to recover. A moderate investor concentrates on developing revenue streams.
Aggressive Investor
A risk-taking investor seeks to maximize earnings by taking on significant risks. As a result, an aggressive investor prioritizes capital growth over generating income or building financial security.
- Ensure Portfolio Diversity
Diversification is always necessary if you want to be successful in the stock market. All eggs in a basket that is damaged when you place all of your eggs in it impacts. However, this is not the case when you divide eggs into multiple baskets. When one basket gets ruined, You have another basket of eggs in case the first one gets damaged. This illustration shows how diversification works. You’re more likely to succeed on stocks, even during a market crisis, if your portfolio, for example, comprises ten diversified assets spread across various industries.
However, how diverse you are will rely on your personal preferences. For instance, according to Warren Buffet, the most successful investor of our time, having three businesses that are performing incredibly well and have a terrific overall performance is preferable to owning one hundred ordinary businesses.
He claimed that making a fortune doesn’t include buying 50 different businesses; rather, it involves identifying oneself with a successful company.
How much time you are willing to spend researching, calculating, and evaluating the market will determine how varied your portfolio should be when it comes to investments.
- Make Use of Compound Interest’s Leverage
Long-term interest compounding is a surefire technique to increase your money on the stock market. The key to Warren Buffet’s success in building riches is this idea. You might be pleasantly surprised by the wealth you accumulate if you prudently save and invest your money over an extended period.
Long-term wealth creation greatly aids in earning interest on interest. Consider saving 50 NGN daily in a local box. That’s a rather small sum of money.
Wrong?
When compounded, that sum of 50 NGN yields nearly 28,250 NGN in a year, demonstrating the power of compounding. But, of course, earning interest in the stock market makes it even more intriguing on the stock exchange. So let’s look at how it functions in the stock market.
Understanding Compound Interest in the Stock Market
Assume Investor P owns 100 NGN worth of dividend stock that pays a 20% dividend yearly. Investor P receives 20 NGN in interest, which he reinvests along with his initial investment. Give that stock a few years, and you’d be surprised at how much interest only 20 NGN would earn. This scenario is possible if your brokerage account invests your interest automatically.
- Pick a Broker with an Open Policy
Many different brokerage accounts are available, and some internet brokers are there to take advantage of people who don’t understand how they operate. Therefore, before selecting a brokerage account, you must answer critical questions.
The average brokerage fee in Nigeria is around 1.85% when you buy and 2.4% when you sell. This fee is acceptable because using brokerage services costs money. However, if there are unstated fees, things get more difficult. Therefore, pick a broker with clear policies and no additional fees. Most significantly, the broker is licensed and authorized to reduce the likelihood of being duped.
- Adopt a Perspective of Long-term Investment
Market fluctuations range from Lafarge to MTN increasing their market value by 78.78 billion nairas in a single day to the stock market closing in the negative as investors lost 20 million as of the time we wrote this post. Despite the market’s volatility, a long-term investor who follows his plan will eventually reward. Be prepared to hold a stock for a long time when you buy it. Numerous investors can verify this is one of the most crucial stock market investment principles.
To Sum Up
The worry of losing all of their stock market investments is the main anxiety that investors, particularly novice investors, face. But here’s the thing: Mr. Risk is your friend if you want to be a successful investor, which means you need to be aware of your level of risk tolerance. Follow these principles to determine risk tolerance, and you’ll gradually accumulate wealth.
These principles mentioned above are starting points when making investment choices, and you can be confident that you will join a group of successful stock market investors.
