If you know the most common risks that come with investing, time to understand what tactics you need to use to minimize those risks and build wealth. When it comes to investing and long-term successful investing, we believe there are three golden rules that are crucial. We briefly touch on them in this article, but because they are so important, we will go into them in more detail in the future. Well, here they are:
Rule #1: invest for the long-term
Investing is something you do for the long term, at least 10 years. It is a way of reallocating your money (giving the money a new destination). If you see investing as reallocation instead of spending, you really create a different mindset, to benefit financially in the future.
You are wasting money on your savings account (the interest rates are so low that your money will be worth less over time), and if you invest for the long term, you benefit from an average return of 8% on the money you invest. €100 euros is €108 euros after one year.
PS: only invest with money that you can afford to do without making sure you have a good buffer in your savings account! We recommend: at least 3x your monthly expenses in your savings account. That gives peace of mind.
Without you having to do anything for it, your money will be worth more, instead of less! As markets and stock exchanges face volatility, prices fluctuates. To avoid suffering from volatility, don’t try to time the market, so don’t try to get in and out at the right time. Studies show that just letting your money sit and do the work, will get you more success than trying to make the right moves every day/week/month.
Rule #2: diversification
Spreading your investment portfolio – diversification when we want to stay chique – means spreading your money across multiple types of products. This is because you don’t want to bet on one horse, because if that horse loses, you lose too. You actually want to bet your money on the entire horse stable, and preferably on all horse stables around the world.
So by spreading your investment portfolio properly, you minimize risk, and that is what we want! As little risk as possible with the highest possible return.
Rule #3: keep costs low
You have no influence on what stock markets and the economy do, but you do have influence on the costs you pay. For every time you put money into the market, you pay a transaction fee. The lower these brokerage fees, the more money you will have for yourself. These costs might seem like small amounts and percentages, but in the long run this can make a huge difference!
In the world of investing, you mainly have to deal with transaction costs, connection costs, fund costs and currency costs.
If you keep in mind these three rules, you can start investing in a very basic way, for example by periodically investing in index trackers. The technique – what may sound like it’s rocket science, let us tell you: it’s not! – spreading your investments in time is called dollar cost averaging.
Index trackers, also called ETFs, are products that track an index of many companies. Think of it as a very large basket, that basket is the index, in that index are many companies. You follow that basket, so what happens in that basket.
For example, there are ETFs that have the 1,700 world’s largest companies in their basket. You will understand that this minimizes your risk enormously, because those 1,700 companies never go bankrupt in one go. If one falls over, or ten if necessary, you still don’t lose all your money.
With periodic investing we mean that you do not invest all your money at once, but that you spread it over periods of time. We will go deeper into periodic investing and explain how you can build up wealth in accordance with this simple investment tactic.