My 7 Investing Rules

Learn how to invest your money

Having investing rules is important as it is what keeps you from following the flock and making questionable moves. How often do you resist buying a hot stock? With some investing rules, you can avoid falling for hot tips or becoming emotional.

I will be the first to admit that it has taken me a few years to really sort out my rules. The goal is not to have a long list but to have some core rules that you cannot ignore when investing. It keeps you honest with your goals.

Investing Rules

1. Invest only in what I know and understand

Peter Lynch said it best if you cannot explain the business so that a child can understand it, then it’s probably too complicated. This mantra is the first filter I apply to the companies I put on my stock watch list.

2. Invest in companies that provide necessities

There are services or products in the world that we cannot live without, those are sustainable services with a consistent or growing demand. For example, financial services, oil & gas, food, utilities, and so on. You can rationalize that something is going to be needed even though it’s not an essential product or service to our lives and that’s fine but your core portfolio should have companies with essential and necessary products.

Once those sectors or necessities are identified, you can start focusing on the best picks. The strength behind this rule is that you can feel confident this company will be around due to the nature of their business.

3. Only invest in dividend-paying stocks

I have made it a focus that I want to be paid when markets go sideways and to that end, my investments must pay a dividend. It also means I can expect a minimum return on my investment while I wait for the stock to appreciate. When you apply this to your stock watchlist, you filter out another really large number of companies.

4. Focus on companies with an economic moat

I look for companies with an economic moat. More often than not, those are large companies. I tend to focus on medium and large-cap companies. Anything under $10B is a little small even if they are developing an economic moat. Companies with an established economic moat will often have grown to be large-cap companies. To that end, I look for an economic moat with a medium to large capitalization

5. DRIP everywhere

I want my money to work, so I let it re-invest itself. This rule will change in retirement but during my wealth accumulation period, I DRIP it all. It’s a form of compound growth. Many companies also offer a discount when you DRIP so you can take advantage of a price discount of 2%, 3%, or even 5% for some companies.

6. Diversify by sector

Diversifying by sectors allows you to add new money to underperforming sectors and take advantage of good buying opportunities. If your diversification is to buy 5 different banks, it’s not really much of diversification from a risk perspective because they are all in the same sector.

You’ll want to assess how much you want to allocate per sector and then start managing it that way. It makes choosing where to add new money an easy task as you want to try to keep the allocation you chose.

7. Limit the number of investments

I have set my number of companies to own and manage at 40. Any more than that and it’s too much to track. I am already there so if I intend to take a new position, I need to sell one. I am also at the point where I simply need to add more money to existing holdings. This number must really come from you and what works for you.

There is an obvious one that I have not added but it’s a hard one … Buy Low, Sell High. The reason I have not mentioned it is that it can be hard to always buy low since you cannot predict what the markets will do. If the market drops for whatever reasons, you can’t beat yourself over it. If you have cash, you can add more but I prefer to rely on my sector allocation to choose where to put my new money. To be a value investor is also quite hard. It’s not easy to identify a good price for a company as it most often trades on future earnings. IF this was easy, why would analysts get it wrong all the time ?!? For some companies, you sometimes have to buy near a 52-week high, that’s just how well those companies do.

Readers: Do you have a rule not listed you want to share?

Source: https://www.dividendearner.com/7-investing-rules/