The Golden Rules of Investing: A Beginner’s Guide

For anyone new to investing, it can seem intimidating. But by following tried-and-true basic rules for investing, you’ll soon be on a path that could lead to financial stability and success. 

With the right approach, investing is accessible to anyone regardless of income level or financial expertise. Following fundamental rules for investing can help you make wise investment choices that match your risk tolerance and financial circumstances. 

13 Key Rules for Investing

Here are 13 key rules to guide you as a beginner investor.

Start With a Strong Foundation

Building a solid personal finance foundation should be your first priority. A strong foundation provides stability and security to help you effectively manage the risk of investing.

A key element of your financial foundation should be an emergency fund. The amount you put into your emergency fund will vary based on your circumstances. However, saving three to six months of living expenses is a good rule of thumb.

This fund provides a buffer in case of unexpected expenses or career setbacks and helps prevent you from tapping into investments too early.

You should also prioritize paying off high-interest debt like credit cards. The average interest rate on credit cards is over 20% — much higher than you can reasonably expect to earn on investments. Aggressively pay down credit card balances before focusing your money on the market.

Set Investment Goals

Clearly defining your investment goals is critical to guiding your strategy and asset allocation. You should divide these goals into three categories:

• Short-term: 3 years or less (a car or vacation)
• Medium-term: 3 to 10 years (a house)
• Long-term: 10 or more years (retirement)

Investing is highly personal, so take the terms of these goals as a general guideline rather than an inflexible rule.

For short-term goals, focus on cash equivalents like money market funds and high-yield savings accounts.

When it comes to medium-term goals, you want to experiment with growth and stability. You can do this through conservative diversified mutual funds and exchange-traded funds (ETFs) which can provide modest growth while reducing volatility.

Retirement is the primary long-term goal, and it calls for assets focused on growth. This longer time horizon allows you to ride out market swings. Long-term goals can be funded with:

• Stocks
• Stock mutual funds
• Diversified index funds
• Real estate

With long-term goals, the growth potential may justify higher risk.

Assess Risk Tolerance

Risk tolerance describes your personal appetite for risk and is a guide to selecting suitable investments.

Investing can flame your emotions, but you need the emotional capacity to withstand market swings and potential losses and weigh them against the potentially high rewards of riskier choices.

If your risk tolerance is more conservative or moderate, you may want more bonds in your portfolio. If you have a more aggressive risk appetite, you may prefer focusing on stocks.

Diversify Your Investments

Diversity is key when it comes to smart investing. You should spread out your investments across different asset classes like:

• Stocks
• Bonds
• Real estate
• Cash equivalents

By diversifying your portfolio, you avoid putting all your eggs in one basket. You’re reducing the risks that come with overexposure to a single asset class.

Within each asset class, you should diversify. For stocks, invest across market sectors and choose companies of varying sizes and geographic locations. For bonds, consider government and corporate varieties.

Do Your Research

You need to understand the potential risks and returns on your investments. Learn what investment options are available to you and thoroughly research them before committing your money. 

For individual stocks, take a look at the company’s financial statements and operations. For funds, look at historical performance, portfolio holdings, fees and management tenure.

Quality research certainly takes time, but it’s worth it.

Have a Plan and Stick to It

Perhaps one of the most important rules for investing is this one: have a plan and stick to it.

In your investment plan, write down the following:

• Goals
• Risk tolerance
• Asset allocation
• Rebalancing strategy

Set a budget for how much you plan to invest on a monthly or quarterly basis. Periodically review and adjust your plan as needed.

Understand the Power of Compound Interest

The power of compound interest can greatly increase your returns over time.

For example, say you invest $10,000 and earn a 7% annual return. You leave that investment alone, never adding more money to it.

After 10 years, compound interest would boost the investment to nearly twice what it was — you’ll have over $19,000. In 10 more years, your investment will nearly double again to over $38,000. The power of compounding interest rewards those who start investing early, although it is unrealistic and unlikely to find a risk-free investment that would pay 7% compound interest for 20 years.

Treat Your Investments Like a Business

Some individuals make the mistake of treating their investments like a gamble rather than a business. Don’t be one of them.

Instead, research each investment thoroughly and monitor its progress, as you would a business you managed. Think like a business owner, not just an investor.

Stay Informed and Adapt

Stay updated on:

• Market trends
• Economic conditions
• Interest rate changes

You should also stay informed on any other factors that influence your investments. When the market environment changes, be ready to adapt your strategy without straying far from your plan.

For example, if you have a stock-heavy portfolio, you may need to rebalance it after a major market drop.

Remaining agile and informed allows you to avoid being blindsided by market shifts.

Monitor and Review Your Investment Portfolio

Regularly review the performance of your overall investment portfolio, as well as each individual holding.

During your reviews, compare returns to relevant benchmarks and adjust investments as needed to stay on track toward your goals.

Trim investments that aren’t meeting your objectives.

Seek Professional Advice if Needed

You don’t have to go at it alone. Consider hiring a fee-based financial adviser if you want investment advice, especially if you’re working on a more complex investment strategy. An adviser can audit your portfolio or help you develop a customized investment plan.

Control Emotions and Avoid Impulsive Decisions

Even the most stoic investors fall prey to their emotions at times, leading them to pivot away from their plans. This can have devastating consequences.

Don’t let emotions drive your investment decisions. Fear can prompt you to panic and sell too soon, while excitement can entice you into investing in hot trends that won’t meet your goals.

Be disciplined in following your plan and resist the urge to make impulsive investments or emotional decisions. 

Be Patient and Think Long Term

One thing is certain: the stock market will fluctuate. Understand that investing is a lifelong process with inevitable peaks and valleys. 

Have realistic expectations for returns and be patient. Don’t obsess over daily market swings. Instead, focus on long-term growth and give your investments years — perhaps even decades — to appreciate.

The Golden Path to Investment Success

You can confidently become an investor, even with no prior knowledge or experience. Start by building a strong personal finance foundation. Then, create a sensible investment plan with clear goals, stay informed, control your emotions and focus on the end game.

By combining patience and discipline with the rules outlined here, you can start your journey toward investment success.

Frequently Asked Questions