Equities are known to have higher volatility over the short run; hence they’re considered more of an investment for the longer term, where there is typically an uptrend. Many equity investors go into the market with the objective of making the highest Return on Investment (ROI) possible, however it is important for them to keep in mind the three basic rules of successful investing, in order to preserve the returns.
Rule #1: Detach your emotions from your money
Overreacting to stock fluctuations can erode your earnings. When you’re constantly buying, and selling in response to the changes in the stock prices, a higher percentage of your returns would go towards trade commissions (which is typically $9.95). The tendency to overreact to these fluctuations has a larger negative impact on trading accounts with smaller balances (such as less than $5000). When possible, avoid excessive trading since it can erode your ROI.
Rule #2: Long-Term Objective
Having a long-term objective is critical especially for equities, since they can have a short run downturn, such as the 2008 stock market crash. Focusing on companies with consistent increases in Earnings Per Share (EPS), and consistent dividends paid out to shareholders typically provides more of a stable investment for the long run. One popular company that meets these criteria is Apple Inc. This company’s stock has grown over 280% since 2010.
Rule #3: Cash Flow
It is a general rule to always have some portion of your portfolio in holdings that provide consistent cash payments, such as bonds. However, the allocation of your portfolio to bond holdings depends on your situation. A male in his 20s with a full time job would be able to handle more risk in his portfolio than someone who is about to retire in about 2 years. It is recommended to speak with your Financial Advisor in regards to having the right allocation of stocks and bonds in your portfolio.
These are the three basic rules to keep in mind while investing – it will help you make wiser investment decisions, and preserve your earnings. Remember to always look at the big picture before making an investment decision.
Writer: Jelani Smith
Disclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.