Money Girl covers 7 critical investing rules to help make your money grow safely--and ensure a happy financial future.
Investing Rule #1: "Saving is a Prerequisite to Investing"
"Unless you have wealthy, benevolent relatives, living within your means and saving money are prerequisites to investing and building wealth.”--Tyson
In other words, your first financial priority is to have a healthy emergency fund that can keep you safe, no matter what. If you aren’t setting aside savings, ask yourself why. Maybe you need to cut back on frivolous spending, create a realistic spending plan, or get a second source of income.
Investing Rule #2: “Be Realistic About Expected Returns"
"Over the long term, 9% to 10% per year is about right for ownership investments (such as stocks and real estate). If you run a small business, you can earn higher returns and even become a multimillionaire, but years of hard work and insight are required.”--Tyson
For example, let’s say you begin investing $500 a month when you’re 30 years old. If you earn an average return of 9%, you’ll have nearly $1.5 million by your 65th birthday. At that same 9% return, you could invest $250 a month from age 25 to 65 and amass over $1.1 million to spend in retirement.
See also: How Much Money Do You Need to Retire?
Investing Rule #3: “Diversify"
"Diversification is a powerful investment concept that helps you to reduce the risk of holding more aggressive investments. Diversifying simply means that you should hold a variety of investments that don’t move in tandem in different market environments. For example, if you invest in stocks, invest worldwide, not just in the U.S. market. You can further diversify by investing in real estate.”--Tyson
The easiest way to diversify your investments is to own one or more low-cost mutual funds. They’re managed by professionals who hold collections of assets—such as stocks, bonds, and cash—which gives you instant diversification.
Investing Rule #4: “Ignore the Minutiae"
"Don’t feel mystified by or feel the need to follow the short-term gyrations of the financial markets. Ultimately, the prices of stocks, bonds, and other financial instruments are determined by supply and demand, which are influenced by thousands of external issues and millions of investors’ expectations and fears."--Tyson
What happens to the financial markets in the short-term only matters if you need to sell out or liquidate your investments in the short-term. That’s why you should never invest money that you might need to spend within the next 5 years. Instead, make solid investments that will grow over the long-term, and never get rattled when you see volatility in the stock market.