5 Investing Rules You Should Consider Breaking - The Humble Penny (2024)

5 Investing Rules You Should Consider Breaking

Rules are there to be broken, surely right?

What I am referring to here is the need to go against conventional norms now and again.

There are certain investing “rules” that have been passed down over time, some of which I definitely break from time to time.

In fact, breaking these rules will likely help save you years of costly experience.

Below are a selection –

1. Timing the market does not work

Trying to time the market sucks!

Don't get me wrong, there are key events that can provide irresistible opportunities e.g. big market corrections or shocking outcomes such as Brexit.

However, timing the market (e.g. for stocks) does not work (at least on a consistent basis) even though we would all love to buy at the bottom and sell at the top.

No one knows what the future holds and attempting to time the market using backward historical patterns is futile.

Instead, focus on staying invested at all times. You’re more likely to ride the wave of the big up days when they occur.

2. Beware of over-diversification

Diversification is good and necessary for managing portfolio risk. But as the saying goes, too much of everything isn't good.

Owning dozens of stocks actually results in diminishing returns and does not make your portfolio properly diversified.

In addition, diversification only reduces non-market risk I.e. it can't help you if the whole market falls for example.

Instead, consider concentrating your stock holdings if you're a stock picker. The market as a whole should not be relevant to you. Focus on the companies you have invested in and don't just sell because the market is lower.

A maximum of 20 holdings will provide enough diversification whilst leaving you time to follow and manage the companies you own a portion of, coupled with room to identify other great businesses to back.

3. Don't buy recommendations. Buy what you know

Buying based on recommendations really goes against the whole point of being an investor. Don't do it!

Instead, focus on buying what you know and keep it simple. This is of critical importance as it will help you build confidence and conviction about why you invest in anything.

Before investing, ask yourself simple questions such as –

How does the company make money? Who are its customers? Who are its competitors and partners? What risks or opportunities do you associate with this company?

If what you know is narrow, consider spending time doing research and educating yourself in other markets.

4. Don't buy stocks. Buy businesses

This seems obvious but isn’t. When you buy “stocks”, what you are really buying is a piece of a real business made of people, assets, products/services etc.

[yellowbar]Think of it this way, if the stock market were to shut down for a number of years, you should be comfortable still holding your investments. [/yellowbar]

Therefore, when you buy a business, it is an investment, whereas trading stock is not an investment.

If you were buying a house today, you wouldn’t think of selling it tomorrow or next week. You’d spend a lot of time researching the makeup of the house, the location etc.

You would do some homework.

The same should be done when you think about “buying stock”. Pause, reflect and do some work.

Related posts:9 Smart Ways to Invest £1,000

5. Don't just “Buy to hold”. Know when to sell

Buying to hold is fantastic, and people tend to buy for various reasons ranging from capital gains, dividends, tax rebates etc. or purely because they believe in the business they’re buying.

Knowing when to sell however is a tricky one. Here are a few reasons you should consider selling:

• You’ve found a better opportunity for your money
• The reasons you purchased the stock has changed
• There is poor consistent performance or untrustworthy management

And here's a bonus rule to break –

6. Money is not the goal

Ofcourse you want to make money as an investor, however, money should not be the goal but rather the outcome.

Falling in love with the process of investing is really what it's all about. This is why the likes of Buffett and Gates are successful in their crafts.

Investing should be a life journey and shouldn't end when you hit the magic number you can live off for your retirement.

I’ll go as far as saying you enjoy this process (of seeking out great companies, doing research, reading financial reports etc) even more when you are able to teach others how to do the same.

Related posts:

• 9 Smart Ways to Invest £1,000
• 8 Things to do Before You Start Investing
• Passive Investing and Why You Should Care

What investing rules have you broken lately? Do comment below.

Do please share this post if you found it useful, and remember,in all things be thankful and Seek Joy.