6 Rules for Investors

The investing world can be a scary place for the average person. Here are six simple rules to follow to help you get a better handle on your finances and protect a little against market volatility.

The investing world can be a scary place for the average person. Instead, most of us simply put our money in the hands of people who have spent years learning strategies and researching potential investments.

There are some general rules people can follow to try and get a better handle on their investments and better control their own financial destinies. Sometimes the best thing is to do little to nothing, but there are also certain rules to never forget, according to The Motley Fool. Here are six to keep in mind when investing.

6. The perfect investment doesn’t exist

Too much risk opens investors up to big loss along with potential huge gains; but taking on too little risk might mean your yields are being outpaced by inflation. Investing is going to be risky no matter what. Portfolio diversification and patience are a good way to balance out the inevitable bad things that will happen to your investments.

5. Forget about past performance

You may have heard the statement “Past performance does not guarantee future success.” One common way to consider an investment’s potential is by looking at its past returns; however, that really doesn’t affect the future performance of the investment.

The Motley Fool points out that a red flag should go up when considering stocks that did exceptionally well recently. Those stocks have a higher likelihood of being overvalued.

4. Tune out the majority of news

One day the headlines are claiming that another recession is on the way and the markets are plummeting; yet, the very next day stocks are soaring because a new report forecasts higher economic growth. The market is volatile enough on its own; don’t hurt your investments by panicking at every piece of news.

You can certainly follow the business news, but don’t let every headline propel you into action.

3. Saving can be more important

You can play the markets all you want, but if you haven’t saved enough then you’ll never reach your goals.

According to an earlier PMD column by Setu Mazumdar, MD, your savings rate impact your investment portfolio value more than investment returns, especially early on in your career:

While the goal of investing is to generate a rate of return that increases the value of your portfolio, it’s actually less important than the one thing that has the greatest impact on the value of your portfolio: the dollar amount of your annual savings.

2. Don’t try to predict the future

At the beginning of 2011, Barclays Capital released its top stock picks of the year, which included AMR Corp. Unfortunately, by the end of the year AMR Corp. — the parent company of American Airlines — went bankrupt.

Even top-notch investment firms cannot accurately predict stock performances, and yet individual investors continue to think that they can pick stocks or time the market. There’s no telling what is going to happen in the future. Consider these truths from just a little over a decade ago from The Motley Fool:

• Greece was strong

• Russia was bankrupt

• Oil cost $13 a barrel

• AOL dominated the Internet

• Apple was a joke

Fortune named Enron one of America’s “most admired corporations”

1. Few in finance have your best interests at heart

According to The Motley Fool, only nine out of 10 people in finance are looking to help you get rich over themselves. Physicians especially have to be wary — as high-income earners, investment professionals consider you “gold-plated targets.”

Read more:

Nine Financial Rules Your Should Never Forget - The Motley Fool