Investing can be complicated – all the time spent researching individual companies, setting up an account, attempting to time the market and deciding whether to hold or sell stocks can be confusing.
But does it really need to be that complicated?
I met a man who retired relatively early, and he claimed he was able to do so using 4 basic investing principles.
Of course I was curious what they were, so I asked. I thought they would involve some formulas, estimates or some other complicated stuff – and boy, was I wrong!
Here are the 4 rules he used to guide himself and his wife to an early retirement – he called them his “4 golden rules for investing”.
Rule #1 – Never invest in anything you don’t understand
He said he worked his entire career in the mining industry, so he focused most of his investing there. It was a natural fit – with decades of hands-on experience, he knew what made a mining company ‘tick’ and was able to apply that information to the markets. His wife worked in banking, so they used that knowledge to invest in banks as well.
I’ve heard this before and I do try to follow it with my own investments. If I don’t understand how a company makes money, what factors can affect a business or where their competition comes from, I try to stay away from it.
I don’t think you need to work in the same industry to invest successfully, but knowing the basics of the company and industry definitely helps.
Rule #2 – Invest with a long term view in mind
All of the short term reports, earnings releases and volumes are basically just useless noise in the long run. He explained that he rarely even checks his stock prices, and when he does it is usually for tax purposes only.
Related: Surviving a Market Meltdown
This is a rule I find is easy to forget. Sometimes when I’m looking at investing in a company, I focus on what their financial picture will look like in the next 6-12 months rather than focusing on the ‘bigger picture’ – the next 10-15 years.
Rule #3 – Know your investment objectives
He bought stocks with two objectives: dividends (most important) and capital gains (less important). The capital gains he didn’t care much about, but he did need to see a solid history of dividends in order to want to invest.
Related: 5 Advantages of Dividend Stocks
I’m the same with my investments – I try to focus on companies that have a solid history of paying dividends and in my opinion, capital gains are nice but secondary to dividends in the long run.
Rule #4 – Keep your fees as low as possible
When he first started investing, trading was very expensive and you couldn’t even make the trades for yourself. So he rarely made any trades and not surprising, the high trading costs acted as a deterrent to selling when the markets took a dive.
Times have sure changed – trading costs are low ($5 per trade) and investors have easy access to their accounts through the web or mobile apps, so it’s easy to trade more frequently. This can lead to higher costs in the long run (not to mention mistakes trying to time the market).
Related: 3 Financial Mistakes We Made in 2013
I use Questrade as my discount broker which keeps my costs as low as possible. As my portfolio grows, the costs as a percentage of my portfolio will only continue to go down.
You’ve probably heard the above investing rules at least once – I know I have. I am not surprised that they all focus on the long term, but I didn’t expect his rules for investing to be so simple.
No complicated formulas. No spreadsheet analysis. No computer-generated analysis models.
What do you think? Do you agree or disagree with his investing rules?