Investing into the stock market is a proven method of increasing our overall wealth over time. But what makes a good investor? What are principles that we should keep in mind?
Invest safely
There is an old adage among investors that goes, “Invest only what you can afford to lose”. In other words, we should remember that there is always going to be inherent risk in anything that we invest in. There is no such thing as a risk-free investment. If a person comes up and guarantees you that his or her investment ideas are bullet-proof and free of risk, then it is most likely that they are scamming you.
Also, when investing our money in a particular asset like stocks, it would be prudent for us to not ‘bet’ our living expenses on it. As confident as you are on the investment decision, you should never risk your survival on it. In the case that the stock does tank and you lose all your investment, you would still be financially capable of taking care of your well being. There will always be risk in any investment, and we should acknowledge it from the get go.
Invest calmly
In addition to proper risk management, a good investor would also keep their emotions in check when making investment decisions. If we cannot control our emotions when it comes to buying and selling our investment assets, then the general advice is to pause or exit the whole investment game.
This is because the nature of the stock market is volatile. Massive fluctuations happen on a daily and huge price corrections are a common occurrence. Due to these volatile changes, we investors would see large changes in prices of the stocks that we own. Thus, we investors may also see that the value of investment assets change drastically.
Fuelled by financial media, it would be very easy for us to get emotional when a large sum of our assets are stored in the stock market. The problem arises when we are not able to control our emotions and rush to making investment decisions. Those are the times when we may rash decisions which would actually cost us our fortune.
Invest early
Peter Mallouk aptly observes the markets’ behavior: “So in the short run, the market is incredibly unpredictable. In the long run, it’s extremely predictable. […] People believe the market goes up and down, that’s not true. The market goes up.”
In line with the principle of staying composed in our investment decisions, Mallouk highlights that we should not be swayed by unpredictability of the short-term fluctuations. Instead, a good investor would always think of their investment as a long-term commitment. Historically, most markets go up over a long period of time (decades). We as investors should keep this in mind when investing.
The time factor is a very important element in investing long term. Coupled with the concept compound interest, we should realise that the earlier we begin our journey in investment, the greater the potential rewards.
Let’s revise how compound interest works. Say we invest $10 today and the annual interest is 10%. One year later, we will have $11.00 in total investment assets. Two years later, you will have $12.10, as the interest that you earn in the first year will compound to provide you more in the second year.
Now imagine if we invest $100 every month (total of $1200 every year). Let’s assume that we are able to gain 10% interest on average year-on-year for 10 years. How much do you think the total investment asset would be after 10, 20 and 30 years?
| Year | Yearly Interest | Total Deposits | Total Interest Generated | Investment Asset |
| 1 | $64.05 | $1,200.00 | $64.05 | $1,264.05 |
| 10 | $1,780.57 | $12,000.00 | $8,145.76 | $20,145.76 |
| 20 | $6,530.84 | $24,000.00 | $48,398.67 | $72,398.67 |
| 30 | $18,851.80 | $36,000.00 | $171,929.27 | $207,929.27 |
Einstein once called compound interest as ‘the eighth wonder of the world’. Magical isn’t it?
Invest safely. Invest calmly. Invest early.
Ruiz