Six rules for worry-free investing

When you invest, always keep the following rules in mind.

Les règles à connaître pour investir intelligemment

1. Be sure you know what you’re buying

If after ten seconds you haven’t understood the investment idea being put to you, it’s best to steer clear. After all, if it sounds too good to be true, it probably is!

2. Keep correlated risk to a minimum

When determining your asset allocation, don’t get drawn in by returns that are not risk-adjusted. As you build your portfolio, think about how each security contributes to the overall risk you’re taking on. Be smart in how you diversify – don’t take it too far.

3. Follow your convictions, but don’t be stubborn

You have to be patient and stay the course, without being too headstrong. If you’re overconfident or stubborn, you could end up paying a heavy price. Stay humble and always challenge your convictions. Make a habit of talking to investment experts, as they’ll be able to give you objective advice. Finally, know what your exit levels are and stay disciplined.

4. Sometimes you have to be brave and go against the grain

You need to know how to take advantage of irrational behaviour. In extreme market conditions, a lot of investors get it wrong. So it’s essential to understand what the consensus is – in order to steer clear of it. Being able to properly read certain indicators, particularly sentiment indicators, will give you an idea of when to re-enter certain markets and when it’s time to make a swift exit. Ask your investment specialist to explain the various indicators they use, and make sure those indicators are reliable.

5. Be wary of low-priced shares

Some stocks are cheap for a reason. Companies with cheap stock often generate little value for their shareholders. Always check whether a company has a strong balance sheet, a viable business model and a solid management team. Focus on companies offering a clear competitive advantage and earnings growth potential over the next three, five and ten years. You should be looking for good companies that are reasonably priced.

6. Focus on real returns

Inflation, taxes and fees can all adversely affect your net return. So be sure you know what point in the macro cycle we’re at, as that will help you to detect inflationary pressures, which could have an impact on your portfolio’s performance. And don’t forget to look into how you will be taxed on the securities in your portfolio and to make sure that transaction, brokerage and management fees are transparent and reasonable.

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