Investing for Dummies 9th edition

20 Rules for Successful Investing

1. Saving is a prerequisite to investing. Unless you have wealthy, benevolent relatives, living within your means and saving money are prerequisites to investing and building wealth.

2. Know the three best wealth-building investments. People of all economic means make their money grow in ownership assets — stocks, real estate, and small business — where they share in the success and profitability of the asset.

3. Be realistic about expected returns. Over the long term, 9 to 10 percent per year is about right for ownership investments (such as stocks and real estate). If you run a small business, you can earn higher returns and even become a multimillionaire, but years of hard work and insight are required.

4. Think long term. Because ownership investments are riskier (more volatile), you must keep a long-term perspective when investing in them. Don’t invest money in such investments unless you plan to hold them for a minimum of five years, preferably a decade or longer.

5. Match the time frame to the investment. Selecting good investments for

yourself involves matching the time frame you have to the riskiness of the

investment. For example, for money that you expect to use within the next

year, focus on safe investments, such as money market funds. Invest your

longer-term money mostly in wealth-building investments.

6. Diversify. Diversification is a powerful investment concept that helps you to

reduce the risk of holding more aggressive investments. Diversifying simply

means that you should hold a variety of investments that don’t move in

tandem in different market environments. For example, if you invest in stocks,

invest worldwide, not just in the U.S. market. You can further diversify by

investing in real estate.

7. Look at the big picture first. Understand your overall financial situation and

how wise investments fit within it. Before you invest, examine your debt

obligations, tax situation, ability to fund retirement accounts, and insurance

coverage.

8. Ignore the minutiae. Don’t feel mystified by or feel the need to follow the

short-term gyrations of the financial markets. Ultimately, the prices of stocks,

bonds, and other financial instruments are determined by supply and demand,

which are influenced by thousands of external issues and millions of investors’

expectations and fears.

9. Allocate your assets. How you divvy up or allocate your money among major

investments greatly determines your returns. The younger you are and the

more money you earmark for the long term, the greater the percentage you

should devote to ownership investments.