
5 Stock Market Rules from the Pros
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These stock market rules will help you customize an investing strategy and take the stress out of investing your money
I donât usually follow the so-called gurus of investing, the money managers you hear about daily in stock market news. More often than not, their hot stock picks are just them trying to pitch an investment they own to get a quick bump in the price so they can sell at a profit.
Turns out the âprosâ arenât always so great at their own game. We looked at how the professional stock market game is a losing battle in a prior post and how just 39% of professional fund managers beat their index while the average fund trails the stock market after including fees.
But there are a few stock market pros that I do follow, not for their individual stock picks but for timeless stock market rules that they offer. The five investing rules below have been proven time and again and are a few of the eight stock market basics I follow to manage my own money.
Check out the infographic of five stock market rules then scroll down for more information on each.
5 Stock Market Rules to Follow and One Investing Mistake to Avoid
Stock Market Rule #1 â Learn what Diversification Really Means
Most investors have heard of diversification but the vast majority donât do it correctly or to its fullest potential. Diversification is the idea that holding many different investments that each react differently to the economy and other factors will smooth your returns and mean stress free investing even in tough times.
Diversification in your portfolio doesnât just mean owning a few stocks from different industries. Asset class diversification is even more important, investing in wholly different assets like bonds, real estate and even peer loans will help you withstand the next stock market crash.
Warren Buffett has said, âThe goal of the non-professional investor should not be to pick winning stocks but to own a cross-section of businesses that in aggregate are bound to do well.â Buffettâs company owns stocks, bonds, real estate and entire companies. The Oracle of Omaha, is the legendary investor behind Berkshire Hathaway which has climbed 682-fold over the last 35 years.
Stock Market Rule #2 â Go West Young ManâŠ.Way West
Even when investors embrace diversification as one of the key stock market rules, they often overlook investments outside the red, white and blue. The average U.S. investor holds just 27% of their portfolio in international stocks despite the fact that international markets make up 65% of global assets. The U.S. is still the largest economy in the world but isnât growing as fast as it used to and holding only domestic assets leaves you dangerously exposed to a recession.
Donât forget to add bonds and real estate within your international diversification through funds like the Vanguard Global ex-US Real Estate (VNQI) and the Vanguard Total International Bond ETF (BNDX).
George Soros, AKA the man that broke the Bank of England, made $1.2 billion on a single day in 1992 betting that the British government would devalue the pound. Soros proves that investing is more than just stocks of U.S. companies. Youâll probably never make a billion on one investment but holding stocks and bonds of international companies can help increase returns and lower risk.
Stock Market Rule #3 â Invest in What You Know
Peter Lynch, has been famously quoted for Invest in What You Know, but told the WSJ it doesnât mean invest in everything you buy at the store. Lynch meant to invest where your experience is most likely to find value. âSomeone with deep restaurant-industry experience would have predicted the success of Panera Bread and Chipotle Mexican Grill.â Lynch managed Fidelityâs Magellan Fund for 13 years, earning 2700% over the period to beat the S&P 500 by 19% a year.
This stock market rule is widely misinterpreted by investors but can be one of the best pieces of investing advice youâll ever get. Spending 40+ hours a week in an industry means youâre going to know much better how the industry runs and which companies might be runaway success stories. Donât try to analyze every sector or industry, just master your own and look for stocks in that space that you think will do very well. Outside of your industry, invest in diversified funds that will capture the market return rather than trying to pick the winners.
Stock Market Rule #4 â Investing is about YOUR Goals
This is one of my favorite stock market rules because it really takes the stress out of investing. Investing isnât about beating the market and jumping in the next hot stock pitched on TV. Itâs about meeting your own financial goals with the appropriate amount of risk. After creating a personal investment plan, many investors are surprised at how little risk they actually need to meet their investing goals.
When asked on CNBC if he felt dumb about selling his Yahoo stock for $200 when it was currently trading at $230, Mark Cuban replied, âItâs hard to feel dumb when youâre flying around in your GV [private jet].â
Investing isnât about picking stocks or about beating the market. Itâs about putting your money to work to meet your goals. Invest in assets that will get you to your goals with less risk rather than stocks pitched on TV. If you only need a 4% return to meet your investing goals, why are you investing in volatile penny stocks that could crash at any moment?
Stock Market Rule #5 â Time is your friend
Time is truly your friend in investing, not only with compound interest but with the money you accumulate just from deposits. Compound interest is the money you make off your returns. For example, if you make a return of 5% this year on $1,000 then youâve made a $50 return. Next year and every year after that, youâll make money off of that $50 and it can really start building up.
Rule #2 of John Bogleâs Ten Simple Rules for Investment Success is, Time is Your Friend, Impulse is Your Enemy. The founder and retired CEO of The Vanguard Group advises investors to, âenjoy the miracle that is compound interest.â
Donât think of your investments as a get-rich scheme but as more of a savings account with a really great interest rate. Regular deposits are so important. In fact, earnings donât amount to more than your deposits until nearly 20 years. Deposit money monthly or quarterly and aim for a modest return of between 4% to 8% over the long-term.
And One Stock Market Mistake to AvoidâŠ
Donât try to beat the market by playing the stock-picking game. Donald Trump made the 1982 Forbes 400 list of richest people, claiming his net worth at $500 million.
But Trump tried to play a professionalâs game in a market that puts professionals to shame.
Trump claimed in 2015 to be worth $10 billion. If he had put his entire $500 million in the S&P 500 in 1982, not trying to beat the market but enjoying its annualized 12% return, he would be worth $20 billion – more than twice his current net worth just by playing the amateurâs game and not making the big investing mistakes.
These five stock market rules are just a few of the investing basics I live by and use to manage my portfolio. They wonât make you rich overnight but they will help you customize an investing strategy to meet your needs and take the stress out of investing your money.
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