There are investing rules for a reason. They guide you in times of distress and help you earn as much money as you can in the good times. Without guiding principles, you will be lost during times of crisis and unsure of what to do. The rules are designed to help you avoid the indecision.
I remember in January 2022 when the S&P 500 was down 8% or so, causing me to lose approximately $32,000 from the highs of my net worth. It was brutally painful. $32,000 is more than I spend in an entire year and I lost that in 3 weeks. It felt like March 2020 all over again!
However, I stayed the course and didn’t do anything with my investments. The only thing I regret is that I didn’t invest money into my 401k because the new company hadn’t set up the 401k systems until my subsequent paychecks. In fact, it’s one of my investing rule to never, ever sell. Especially not my 401k.
In my short 6 years of the investing journey, there’s been many trials and attacks from all fronts that made me question my investing rules. I’m happy to report that I passed all of those tests and am now doing very well. The biggest trying time of my life was in March 2020 when I lost ~$90,000.
I watched as my net worth went from $235,000 all the way down to $145,000. It was brutally painful. The only thing that saved me was that I didn’t know how my 401k interface worked. The user interface for my 401k is so complicated that I couldn’t sell even if I wanted to.
That was the saving grace. How lucky was I that my 401k providers are not good.
9 Necessary Investing Rules
One necessary investing rule is to SMASH that social share button and post to your favorite social media! Your friends could be missing out on gains and this article could help them get to their financial goals.
So with that said let’s get into the rules you can use for your own investing.
1) Don’t Lose Money is the Best Investing Rule
Rule number one is don’t lose money. Rule number two is don’t forget rule number one. Here’s why losing money is the worst thing you can do. First, you don’t just lose money, you lose time. Second, It takes a great amount of returns just to get back to break even. Here is the chart:
| Losses | Gains to Break Even |
| 10% | 11% |
| 25% | 33% |
| 33% | 49% |
| 50% | 100% |
As you can see from the chart above, you need a bigger gain than your losses just to break even. Does this investing rule mean to never have losses? Absolutely not. No investor has faced zero losses in their lives. Absolutely none. However, it does mean to be very careful with your investing.
It’s hard to reverse the money you lost because it takes much more gains to replace the losses. If you lose half of your portfolio, you need to DOUBLE your money just to break even. It’s hard to get 7% returns in one year, but to double it? It’s not the easiest thing in the world to say the least.
This is easily number one of the investing rules.
2) Don’t Time the Market
This is one of the iconic investing rules. Time IN the market is better than timING the market. Many index fund passive investors outperform the active investors because all they do is sit and relax. Even during down days, they just stay the course and don’t think about their investments.
Very few people can time the market. Trust me, because I’ve tried. I’ve lost so much money day trading, a healthy $10,000 or so day trading. I’ve since then learned my lesson and decided to be a buy and hold investor. I made close to $100,000 because I just bought and held the S&P 500.
There’s going to be much more volatile periods than the ones I experienced in January 2022 and March 2020. When there is, I know I’m just going to quietly hold and do nothing about it. It’s easy, simple, and most of all, it works. Doing nothing is better than doing a bad thing. Avoid doing bad things whenever you can.
3) Be Consistent
When you have a 9-5, it’s more important than ever to be consistent with your contributions. Steadily invest your money in a broad market index fund and invest your money whether the market goes up or down. It’s one of the investing rules I still follow to this day.
Ever since I started working full time in July 2016, all I did was consistently put my money to work in the S&P 500 every paycheck. Without fail. No exceptions. I just let my money go to the market and take advantage of the company match they offered in my 401k.
Many of my friends didn’t because they thought retirement was so far away. I can’t believe they thought this way because they had access to one of the most crucial times of their lives. Consistently put your money to work. It doesn’t have to be every paycheck but it does need to be consistent.
4) Don’t Invest All of Your Money
When you’re 100% invested in the markets, you have zero margin of error. You are running on such thin lines that any hiccup has the potential to ruin you. Don’t invest all of your money, keep some in your emergency fund for when bad things happen. Bad things don’t happen until they do one day.
You need a buffer and a safety net for when you have a rainy day. I personally have approximately $35,000 in my savings account just for when that rainy day comes. That’s about a year+ worth of my expenses and I’m happy to keep it there. It gives me the peace of mind knowing that now all of my money is invested in the market.
Investing rules don’t have to apply to how or what you’re investing in. It can apply to what you do with the money that you don’t invest. You don’t want to base your financial decisions on when everything was going good and thinking it’ll be good forever. That’s not reality.
5) Invest for the Long Haul
Too many people think investing is a get rich quick scheme or they think it is a form of gambling. That’s not true. One of the necessary investing rules is that you have to look towards the long term. The short term, anything can happen. However, long term, you’re more likely than not to gain money.
The S&P 500 never returned a negative result over any 20 year period. Past results do not indicate future performance. However, why bet against something that has a 100% win rate? Once I shifted my focus from the short term mindset to the long term mindset is when I started making money.
That’s what helped me finally be profitable when it comes to investing. When I looked at the longer time frame and didn’t care about the short term fluctuations of the market. These days, I understand that losses are just a part of the game. If I lose 8% of my net worth in a month, I still look towards the longer term.
6) Don’t Day Trade
I get it. You think, “what if I just make an extra 2% per week? Then it’ll be fine!” While that’s all well and all, it’s actually very hard to make 2% per week. You’re not thinking about the potential losses that can happen throughout the week in order to get back to break even. Even 0.5% per week is phenomenal.
Day trading leads you to this mindset that an extra 2% per week is a completely doable goal. It’s doable but it’s not as easy as you think it is. It’s no wonder that one of the investing rules is to not day trade. Day trading is taking advantage of the short term fluctuations of the market.
Investing is when you look at the longer term horizon and make a good bet that something will work out and withstand the test of time. Time is the biggest test that investors have to pass. Otherwise, they’re just day trading and not investing based on the fundamentals of the asset class.
7) Reinvest Dividends
Here is a good article on what the difference in returns are between reinvested and invested dividends. The S&P 500’s annual returns would be 7.5% in the 25 years from 1993 to 2018. Compared to 9.7% per year with reinvested dividends. That 2%+ annual return difference is HUGE when it comes to investing.
It’s two hundred basis points. Per year. On a $100,000 investment, that’s close to $2k per year. Over 25 years, that is almost $50,000. Which is a very large amount of money. The investing rules dictate for you to reinvest the dividends because the return differences are huge.
The best thing is to set your investments to automatically DRIP (dividend reinvestment plan) so that you don’t forget. When you take advantage of automation, there are no chances for human error to enter the chat. Dividends don’t make a difference in any one off year. Over time, it influences your portfolio tremendously.
8) Take the Emotion Out of It
One of the hardest investing rules of them all. We’re all human. We have emotions. When something as highly emotional as money is at stake, we can’t help but feel something when the market goes up and down with it. That is our most expensive enemy that we have. Emotions.
Money that’s used for investing is just money. It doesn’t matter at all. Whether it goes up or whether it goes down, it shouldn’t matter. If it does, then that means you either don’t have enough money coming in that covers your expenses or you’re invested too much in the market.
Before, an 8% monthly decline would be hugely detrimental to my psyche. These days, it’s just another day. First, I have a great that that covers all of my expenses and then some. Second, I learned how to be resilient in times of stress when it comes to investing. These days, an 8% decline doesn’t feel like anything to me.
9) Don’t Break the Investing Rules
And lastly, don’t make investing rules if you were going to break them anyway. Don’t suddenly say that “you’re going to be a long term investor” just as the market crashes. People who say stuff like this have the highest chance of selling as soon as we recover a nominal amount like 1%.
Set your investing rules and review them from time to time to remind yourself what you’re doing it for. It’s too easy to break them because you justify it by saying, “well, it’s just one time”. You’re going to keep saying it’s only one time every time. How do I know that? I broke the rules quite often.
There’s so many times I couldn’t handle the heat and sold my investments only for them to recover to new heights just weeks or months later. It’s not a good feeling. Then I’m forced to buy back in at a higher price which goes down in price after a couple of months. Set your rule and forget about it.
Investing Rules Help You Make Money
You made the investing rules for one reason: to make money. I set my investment rules for you so that it can serve as a guideline. However, what rules you want to follow is ultimately up to you. Many investors lose money not because they don’t have ability but because they break so much of their own rules.
The market is going to test you on every single investing rule you have. At one point or another. If you invest over your lifetime, that’s a long amount of time to see every trick in the book happen. You think it won’t happen in your lifetime until it does. That’s why it’ll be more important than ever to follow your own rules.
Pass those tests with flying colors simply by not doing anything with your investments. The stock market tested my ability to stay the course and not sell when it got really tough. In the beginning, I would fail quite easily. These days, as a seasoned investor, I don’t let those things rattle me anymore.
Remember that investing is the cornerstone for financial freedom. It’s not how much money you make, it’s about how much of your income you invest in the market. It’s the extraneous side incomes that’s going to make the difference whether you succeed or not. Invest your way to freedom.
If it’s that important to your financial future, then it’s a good idea to have stringent rules around it. You’re not going to get there by not taking intentional choices. It’s not about luck, it’s about making intentional choices that is going to make the difference of elevating you to success or putting you down for failure.
Investing rules help you get there.
9 Investing Rules Shortlist:
- Don’t lose money is the best investing rule
- Don’t time the market
- Be consistent
- Don’t invest all your money
- Invest for the long haul
- Don’t day trade
- Reinvest dividends
- Take the emotion out of it
- Don’t break the investing rules
