6 Rules of Investing Like a Pro to Reap the Long-Term Rewards

Over the short term, stocks and bonds go up, and stocks and bonds go down. Sometimes significantly and sometimes at the same time. But that is okay. Investing is a long-term proposition. If you don’t treat it as such, you will financially damage your long-term investing success. If you can stick to the six rules of investing during the most challenging times, you will supercharge your portfolio, making it stronger and better able to achieve your goals.

These rules are not some secret sauce. There are no guarantees to investing other than it’s a long game. Yes, even retirement, which hopefully will last twenty or more years. There will be ups and downs. Count on it. It doesn’t matter if you’re 25 and starting to invest or 65 and entering retirement. Sticking to these six simple investment rules will pay dividends (okay, that was an easy pun). 

Rule #1: Do not, under any circumstances, cash in your investments when the economy or markets are doom and gloom.

Cashing in your investments is a big mistake and causes the most harm. Although it is never pleasant to see your investments in negative territory, it happens. It is not a permanent condition. 2008/2009 was painful – the same goes for March 2020. There will be a recovery. It may be next month, next year, or two years, but make no mistake, your investments will recover. You must have patience. Selling during the darkest days guarantees you make it extremely difficult to overcome your losses. 

Rule #2: Do not get greedy and ride an exuberant market when delaying rebalancing.

Yes, this is the flip side of the coin of Rule #1. In times of crazy market valuations, do not believe that the good times will never end. They will, my friend. Any good investor has a target portfolio allocation. Please rebalance if your fund or allocation target has gone above the threshold to rebalance. Your portfolio differs from a casino or racetrack when you want to ride a hot hand. 

Rules #1 and #2 We call the Kenny Rogers Rules. You got to know when to hold ’em (rule #1), know when to fold ’em (Rule #2)

Rule #3: Re-assess your risk tolerance every three years.

Your life changes—your needs change. Your goals change. Life happens. There are too many variables in life. Nothing is ever static, and neither is your risk tolerance or capacity. You should always track how much risk you are comfortable taking versus how much risk you can afford. See our recent blog post, A Simple Investment Risk Assessment Actually Creates Peace of Mind and Investment Success.

Rule #4: If you have a chosen asset allocation, you must be prepared to accept the potential loss and gains.

Investing is not a one-way street. If you want the gains, you must accept the occasional pains. There are ways to minimize loss but not avoid it altogether. If you cannot bear the potential loss of your portfolio based on previous recessions or economic downturns, then you should move to a more conservative portfolio.

Rule #5: Don’t forget about interest and dividends!

Interest and dividends have become the forgotten step-children of investing. In the past fifteen years, the go-go, growth, and low yields have pushed income aside. Interest and dividends are your friends, always there for you. Especially during difficult times. Dependable every month or quarter, reinvesting, quietly buying more, and sneakily increasing your wealth. They are the secret weapon of investing. It doesn’t matter if the market is up or down. Your portfolio is generating income, working behind the scenes, and strengthening your portfolio for the subsequent recovery. 

Rule # 5 is why you don’t want to do rule #1. Your best action is to ride it out and let the interest and dividends do their magic and buy low. 

Rule #6: Household accounts work together!

This one is sometimes hard to grasp. This rule applies if you or your spouse have multiple accounts, such as a taxable account, traditional IRA, or Roth IRA. They all have different tax consequences. Most likely, they may even have various account balances. They are still considered one portfolio. They should be viewed as one portfolio and not one account compared to another. While each has its job to do individually, combined, they make up your well-rounded, diversified portfolio.

Final Thoughts

Investing is cyclical. Times of irrational market behavior, both good and bad. None of which you can control. Your job is to control your emotions and not make decisions that will hurt your long-term financial success. It would be best to remain even-keeled, accepting temporary downturns as the cost of doing business and the engine that drives your investments forward in the eventual recovery.

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