Are you one of those people that lives a very structured life? The answer to where to invest money comes from knowing your financial rules. Everything has it’s place and rules govern it all? Or are you one of those free spirits who goes in to everything with the hope that in the end it all somehow works out?
If you are an investor who wants to do well in the market you have to have rules. A methodology that is never broken. I have some financial rules that keep me from taking unintelligent or unnecessary risks. I thought I would share some of those with you although I have to admit, there have been many times that I have broken those rules and nearly every time, I have paid.
Playing the lesser knowns is sometimes where to invest money– My first financial rule is that although I tell part time investors to largely stay with larger companies with a proven track record, sometimes that can be a little boring. Have the thrill of making a big win keeps you involved in the market and because of that, you are more likely to keep a closer eye on all of your stocks. Plus, if you always play it safe, you are more than likely going to make the kind of money you are looking to make. Just remember, when investing in the smaller companies, you have to do your research and know why you are investing your money in them.
I always have buy and sell levels- Managing money that you worked hard to make means that financial decisions are often emotional. If you think about your past, it probably doesn’t take long to recall those regretted decisions made on emotion. When you buy a stock, you should already know when you plan to sell it. Knowing where to invest money also means knowing when to get out of a position.
Take for example, my latest purchase. Just two days ago after a one day run up of 8%, I made the decision to short Deere. (That’s when you make money when the stock drops in price.) I said that as it made 5% I was going to take my profits. Yesterday, as soon as it hit 5%, I sold. No emotion. Emotion always does a great job of losing you money.
The amateur is fully invested. 20% of your portfolio, at lease, should be in cash. The last thing you want is the trade of year to show up on your doorstep and you have no money to do it. You always have to have money ready to go. If I were to call my local police station and ask them to come to my home, they don’t send every car. This financial rule is simple: Always be in a position to fund the next hot move.
Diversification is key- If you have read any articles for the beginning investor, you know that you have to be diversified. Without diversification, you will, at some point, see your entire portfolio crushed. Stocks move together. 50% of a stocks movement comes from its sector. If Google has a bad day, chances are that Apple did too. In this case, where to invest money has an easy answer: multiple places.
If Exxon report bad earnings, Chevron will be adversely affected as well. If Exxon does have a bad day and your diversified, it will only affect 20% of your holdings. Exxon reporting bad earning won’t affect Apple. Have no more than 20% of your money in one sector. You can also diversify with low risk vs. high risk
What are your financial rules? These rules dictate where to invest money. I have plenty more but these are the important ones. It’s coming up on 11:30 and one of my rules is that lunch is at 11:45 every day. Has anybody seen the movie, Rainman?