9 Fundamental Principles that one must follow while Investing – Guardian Nigeria

Businessman With Piggybank And Coins
Almost everybody knows that wealth creation is a marathon race, but still many practice sprints. While a marathon focuses on the long run, a sprint focuses on the short run. Financial magnets like Warren Buffet and Carlos Slim have reaped the benefits from long term investment planning & value investing, not sprinting.
Discipline and long-term planning are key ingredients of investment. Whether you’re a seasoned portfolio manager or a novice investor, some fundamental investment principles apply to everyone.
In this article, we will decode the important investment principles you can apply in your investment strategy.
1. Establish a realistic financial plan based on your goals
Before investing, define your life goals. Are you planning for early retirement or considering buying a second home?
While setting your goals, set a time frame for each one of them. Once these goals are set, it will become easy for you to pick types of investments that will give you those returns.
Everyone wants the highest return on their investments without much risk. Unfortunately, there is no such investment. Low-risk investments will often yield lower returns and vice versa.
Depending on your plan & risk appetite, you can invest in stocks or equities, bonds, forex, cryptos, ETFs etc.
So, it’s important to set realistic goals and be ready for some bumpy roads ahead. Have patience, Rome was not built in one day.
2. Start Saving and Investing early
Start now.
Develop a habit of saving at an early age. Don’t wait for the right time, there is never going to be a better time than now.
For instance, if someone had invested just $1000 in Apple stock in 1981, his investment in 2021 will now worth more than 1 million dollars.
It doesn’t matter how much you earn right now, park some percentage of it for investments. Plant your seeds today to enjoy the fruits of tomorrow.
3. Embrace/Follow an Investing Strategy
Do you know what kind of investor you are?
As you know Messi and Ronaldo both are world-class footballers but they differ in their playing style, similarly, every investor has their investment style.
Some are value investors, while some like to play on the edge. Generally, there are five kinds of investors:
4. Diversification and Asset Allocation is Vital
Generally, small investments in several assets are considered a good investment strategy.
Everybody thinks that they can beat the market, but unfortunately, that’s nearly impossible to be correct all the time. If your portfolio consists of five or ten assets diversified across different sectors, you are more likely to survive even when the market is bearish.
As an example, some sectors did bad during Covid-19 pandemic, while stocks of companies related to tech were booming. If an investor had a diversified portfolio, the risk would be lower & spread across multiple sectors.
However, avoid over-diversification or under-diversification. Over-diversification can make you less likely to gain significantly from your investments. The latter may result in substantial losses in unfavourable market conditions.
5. Minimize fees and taxes
Nigerian stockbrokers charge max 1.85% of investment size when you buy a stock, while max 2.4% every time you sell. Although, these fees can be much lower depending on the broker.
Brokers’ commission vary, so choose a broker that has a transparent policy and there are no hidden charges. Plus, you must ensure the broker is regulated and licensed by NSE.
Similarly, if you are trading in the forex market, different brokers charge different fees and spread. There are no regulated forex brokers currently in Nigeria, so you must compare all the best forex brokers that are regulated with regulators like FSCA in South Africa & FCA in UK, check their reviews, and then choose a broker that has lowest spread and lowest commission per trade. The exact fees will depend on the instrument that you are trading & your market position size.
Some forex brokers also charge fees of 2-3% during funding & withdrawals. These expenses might look small but over time it can reduce your actual returns or even cause loss to you if the broker charges too much.
Similarly, tax on capital gains can further reduce your actual ROI (return on investment). You should probably invest some amount in tax-saving schemes and assets like mutual funds, Nigerian government securities, saving bonds, etc.
6. Invest for the Long Term
Patience is key.
It’s unlikely that you have heard about Prince Alwaleed Bin Talal if you are starting fresh in the investment world. But he is a well-known name on Wall Street. When everybody was selling Citicorp in the 1990s, he holds his investments and became one of the largest shareholders in Citigroup.
Do your research and have faith in yourself (not in the market), the best moves are made when the market is volatile.
7. Hedge against significant losses
Any kind of investment is not immune to risk. Nobody knows when the next market crash coming or the next pandemic which will cause panic in the market. That’s why it’s important to hedge against possible risks.
Minor losses (average up and down) are fine, but significant losses can take years to recover.
There are several investment tools and hedging strategies that you can use to minimize risks. Tools such as ‘long put position’, ‘fence’, ‘stop-loss’ and ‘covered call’ can be effective hedging options.
Diversification is perhaps the best long-term strategy to hedge against the portfolio risk. Having some investment in liquid forms (cash and national saving deposits) can also be helpful.
8. Employ Risk Management Strategies
Every investor has one simple goal – get the highest ROI. But the financial market doesn’t cater to the wishes of investors.
There are two simple rules of being a successful investor – first, never lose; second, never forget the first. That’s rhetoric, not feasible.
However, certain risk management strategies will help you to reduce some of the potential risks:
9. Ignore the noise and stick to plan
The likes of Warren Buffet and Carlos Slim all share one common thing – don’t make decisions based on market noise. They don’t focus on what is happening in present. They analyze the entire economy from an eagle-eye view and see how the present momentum will unfold in the future.
In simple words, their thinking is always future-oriented.
Focus on the bigger picture. Be open-minded. Look for undervalued stocks at discounted prices, they can become hot assets if they continue growing. Early investments in promising new stocks can yield good results. Also, avoid financial market instruments that you don’t know about.
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