Good, tried-and-tested investment rules enable you to develop effective strategies and tactics. If you want your investment to flourish, internalize the 12 golden rules of investment and make them part of every endeavor.
Before you start investing, it’s good to spend some time on preparation. Investment is kind of like the crown of personal finance management. To better explain it, I have prepared “A pyramid of personal finance management”.
The foundation of all money management is budgeting. A well-prepared budget for every month in the shorter term and then every year, or 2-10 in the medium and longer term respectively is an essential framework for your finances. It enables you to act rationally. It helps to navigate through the complexities of life straight to your key financial goals, whether they be big or small.
The next level of the pyramid is saving. Everyone who wants to be successful in finance, whether personal or corporate, must be able to save money. Saving money needs to be a habit, a default behavior, being the lion’s share of your financial decisions.
The third level of personal finance is debt management. Because of the nature of modern finance, everyone should know how to deal with debt, how to manage debts well, and of course how to get rid of debt.
When you have experience of budgeting your money, when you have savings, -ideally as an emergency capital equal to 3-6 months of your normal earnings- and you have paid your debt off, you can start planning your investment. This is level 4 of personal finance management.
While preparing for investments, you certainly have to understand the value of delayed gratification If we could imagine an ideal model of an investor mindset, this would be a key feature.
When you invest, you sacrifice your present comfort in order to bring prosperity in the future. It takes faith, patience and self-discipline to do that. Most of us don’t want to even think about it. The majority always want to have something now, and pay for it in future. That is why societies in developed countries are sinking in debt.
I would also strongly recommend taking into account all kind of biases we humans have developed which can stop us from making proper investment decisions. Wikipedia identifies 104 biases.
There are four categories of cognitive biases.The first is a result of too much information: you can’t actually make a rational decision if you are not able to process all the available and relevant information.
The second group arises from not enough meaning: even if you gather all the relevant information, most of time you may struggle with assigning them a proper meaning. This the moment when we can use stereotypes, previous experience and preconceived beliefs to aid our decisions.
The next group contains biases which are a result of our memories. The way how we remember things, how we omit some facts and construct reality makes susceptible to another kind of biases.And the last group contains biases which are a direct consequence of lack of time. If you have to make a decision now and you can’t wait until all research and analysis are made, you will have to act by choosing simpler solutions over the more complex ones. It is easier and faster to comprehend one simple option than an option which is complex and requires more cognitive power.
I want to draw your attention to the 5 dangerous biases in investing.The “It has always been like this” bias can annihilate your investment if you believe that there is an incontrovertible link between a past and a future. You might have earned money ten times in an identical situation, but it doesn’t give a guarantee that the eleventh time will be the same.