10 Forever-Rules for You to Master the Stock Market and Build Wealth
Read. Understand. Apply.
Dear Investor,
Today we’ll introduce 10 forever-rules for beginners and experienced investors for success in the stock market and longterm wealth creation.
These rules are not meant to just “read once and forget”. These are fundamental rules that should more or less guideline and set the trend for investing behaviour, risk tolerance and longterm mindset. These rules apply to all asset classes, but do not apply to trading or short term investing.
Without further talks, let´s go!
1. Invest and Behave with a Long-Term Perspective
Investing is a marathon, not a sprint.
When you first enter the investing world, it can be tempting to chase quick gains, especially with the market's volatile nature. Percentages here and there, everything is new, you hear of wonderful and exiting opportunities and so on.
However, successful investing is rooted in patience and a long-term mindset.
The stock market tends to grow over time, while retraces and declines are normal, just part of the game.
Most likely you have saw on the news that “market is collapsing” or “Nasdaq has fallen - 10 %” or “SP500 has crashed”.
Just forget the noise.
10% decline is nothing and nowhere near a crash. If you are a longterm investor, you should not worry about these things. Even if market would decline - 50%, that would offer better investing opportunities.
Investing with a long-term perspective allows you ride the market cycles and decades to come and enjoy the compounding effect of your investments.
Such news have only one (1) purpose: Negative market news are meant to cause panic and make you do stupid, fast and unrational decision you most likely would regret in years to come.
What does “behave” on the title refer for?
Rather than reacting to every market dip or peak, focus on your broader financial goals, such as;
are you investing for low-cost index funds or to high-cost funds that bank customer service offered “just for you”? Might want to reconsider that.
are to investing
to yourself (best investment ever)
regularly to the market (monthly / quarterly).
are you simultaneously paying off debt or have you paid of debts already (exc. mortgage).
Think about these and review your current situation. When above things are ok for you, you start to “behave” calm. You won´t react to those panic news or even think about investing that much. You just do it, according to your own style.
Above helps to reduce emotional decision-making, which can undermine long-term success.
2. Invest in Stocks with “Patient” Money
“Patient money” refers to capital that you don't need for immediate expenses and can afford to leave invested over a prolonged period. This is not your 2 - months buffer for rent, or whatsoever. Patient money is something you won´t need and you would not even notice its absence.
This is crucial for beginner investors, as it allows you to weather the volatility of the market. Beginners usually put a lot of funds to investing and forget personal finance because of the hype or FOMO. If you are new to investing, don’t do that. The same applies if you know you have big expenses coming up or you are saving for example to mortgage down payment.
You’ll need that money soon. Leave it on high interest or fixed interest account. Do not hold it on normal bank account for too long, as banks pay you zero to none interest on those accounts.
"Patient money" is essential for building wealth without constantly worrying about short-term market movements and also a smart tool for personal finance.
3. Diversify for Multiple Asset Classes
Your investments should be part of a comprehensive financial plan that takes into account your entire wealth distribution. Don’t overexpose yourself to risk by putting all your money into one asset class, even if you’re excited by the potential returns. Or even if you would know a lot about that asset class.
A diversified portfolio could include for example stocks, bonds, cash reserves, and other investment vehicles, such as real estate. Besides being interesting you learn a lot from a diversified portfolio. You’ll learn about how different markets work or do not work.
Review your financial situation and portfolio diversification from your own perspective, and diversify to different asset classes based on your time horizon, risk tolerance, and future needs.
4. Take Risk According to Your Personal Risk Tolerance
Risk tolerance varies greatly among investors, but understanding your own risk appetite is key to long-term success. Risk and reward are intrinsically linked, but the amount of risk you take on should be aligned with your personal financial goals, risk tolerance and emotional comfort.
“Emotional comfort” refers to situation when your risk is in line with your risk appetite and current lifestyle. Too much debt can make you lose sleep. Not enough cashflow to cover for monthly expenses get s you stressed. Younger investors typically have the ability to take on more risk, as they have a longer time horizon for compound interest and recover from risky mistakes on the market fluctuations.
You current lifestyle matters.
If you are on a retirement you’ll need steady income with lower risk. If you are on your 20´s, in general everyone tells young people should focus for growth investing. But people often forget they were on their 20´s once.
When you are on your 20´s, you have a shitload of energy, time and desire to experience life in general. And for those you’ll need income.
Read this posts to understand why you should invest for cashflow aswell.
Whatever the case, make sure to assess your risk tolerance regularly and adjust your investments accordingly.
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5. Focus on Investment Liquidity
Liquidity is something many investor think last - or usually never.
Liquidity refers to how an asset can be converted into cash without significantly affecting its price. For example, listen big corporation stocks sustain sky-high liquidity for ages. Few examples could be Coca-Cola (“KO”) and Amazon inc. (“AMZ”).
Because stock market offers access to global funds and transactions, above makes sense.
However, for example real estate is illiquid. Selling properties or houses is slow, volumes are low and there are other set of requirements as well, such us down payments and collaterals.
For beginner investors, it's important to balance between illiquid investments (like real estate or private equity) and more liquid assets (such as stocks and bonds). Having a portion of your portfolio in liquid assets ensures you can access funds quickly when needed, without having to sell at an unfavorable time.
6. Invest Early and Often & DCA.
One of the easiest ways to build wealth over time is to invest consistently. If you didn’t start early, it doesn’t matter, because you can start now.
Right now, do it today if you haven´t already.
DCA = Dollar Cost Average refers to making monthly/quarterly contributions to selected investments and asset classes on repeat, what ever the market price.
DCA is an efficient strategy to ensure regular participation in the market, regardless of market conditions. You buy something high, something low, and you mitigate risk and market volatility, while staying on the market. You don´t have to think about prices and when to buy or sell.
Simple and effective.
7. Invest in 5-10 Companies from Different Industries or pick ETF’s.
Or do both, like I and many others…
Concentrating your investments in a small number of companies, for e can yield great returns, but it also exposes you to significant risk. Diversifying your portfolio by investing in 5-10 different companies across different industries helps to reduce this risk. You are less likely to experience a major loss if one sector or industry suffers.
You can also pick ETF´s or invest to index funds for diversification. Wins won´t be as big as with owning just a few well performing companies, but losses won´t be that heavy either.
Too much diversification is known to diminishing returns and not offering that much difference for risk management, so do not go too far with this. Owning like 80-100 different stocks is completely unnecessary - yes, this happens more often than you´d think of. I´ve had a few clients asking just this.
8. Pay Attention to Investment Costs
This one is easy to overlook, but the costs associated with investing can eat into your returns over time. These include brokerage fees, fund management expenses, and taxes. For example, actively managed funds may charge higher fees, which can significantly reduce your long-term returns compared to low-cost index funds.
The is an old saying that goes like this:
If bank recommend you to buy shares of company A, with very high likelihood bank itself is selling the same shares of company A. The bank just want to use you as liquidity - and to make profit from fees you pay.
In general, if you buy index funds with 1% fees you are fooled big time. Bank / broker fees may take 20-30% of your returns in longterm.
Be smart with your capital allocation. Think it through once and then you don´t have to worry of it anymore, basically.
9. Invest in Mutual Funds if You Don’t Have Time or Expertise to Track Investments
Focus to low-cost passive index funds or low cost ETF´s as your baseline for investing.
After that, go for income and dividend investing.
Cashflow pays for your life, while those low-cost assets grow over time.
You won´t be at the finish line first, but you will be there for sure.
If you can pick a winning team, why wouldn’t you?
10. Follow the Markets Actively for Personal Development Opportunities
Investing is as much about personal growth as it is about financial success.
Keeping an eye on market trends, reading financial news, and following big institutions can open up new opportunities for both learning and growth. The more you understand the markets, the better equipped you’ll be to make informed decisions.
Stay engaged and curious.
Your development as an investor is an ongoing journey, and each market fluctuation can offer insights into how markets work. By continuing to learn and stay updated on market movements, you’ll not only become more confident in your decisions but also discover new strategies and opportunities to advance your investing career.
FINALLY - BEST INVESTMENT IS YOURSELF
Best investment you ever can make is YOU.
Invest for experiences for valuable memories. Invest for quality clothing to increase confidence and feel fell. Learn about 1-2 new and different topics every year.
Invest for your fitness, teeth and gut health. Invest for your workouts and the food you eat. Invest for your sleep and recovery.
It is not always about the markets or who makes the most money or has best performance year-over-year. What is the point of investing if you do not spend the profits? If you are saving everything for retirement, that is fine, but you perhaps want to reconsider that.
Try it. Sell a small portion of your assets, do something you love, get energy from or what makes you happy. Then ask yourself - “do I regret this?”
You won´t.
Thank you for being here!
Well done! Love the last one, as investing in self is often ignored in our portfolio of life. It's the basis of my podcast, Investment of Self :)