The 10 Commandments of Successful Investing

Posted on Posted in Investing, Retirement

Smart investing isn’t as hard as it seems.

You just need to consistently apply the right principles—principles that have been proven successful time and time again. I call these bedrock tenets the 10 commandments of investing.

#1: Thou Shalt Take Action

Inaction is the number one reason people fail financially. Too often we get trapped by financial excuses that prevent us from taking action. We think investing is too hard, too time consuming, or too risky. We say we’ll invest when we have more time or more money. Truth is, the excuses never have a deadline, they’ll last as long as we allow them to.

#2: Thou Shalt Invest For the Long Haul

Short-term investing isn’t really investing at all—it’s trading. And it doesn’t have nearly the same power as long-term investing when it comes to generating wealth. Investing for the long haul enables you to take advantage of compound interest, which is one of the single most powerful financial principles.

#3: Thou Shalt Prioritize Your Investing Appropriately

Using the right investing strategy can expedite your financial freedom. Here’s the general pattern you’ll want to use: (1) take advantage of “free” money through employer match; (2) invest in tax advantaged accounts like Roth or Traditional IRAs or real estate; (3) invest tax efficiently by prioritizing dividends over interest.

#4: Thou Shalt Diversify Your Investments

Diversification is one of the most powerful tools to reduce investment risk. When we diversify, we spread our risk over different companies, industries, sectors, and asset classes. I also recommend holding assets that don’t get traded in the market such as real estate.

#5: Thou Shalt Allocate, Evaluate & Rebalance Your Portfolio Appropriately 

In order to allocate your assets most effectively you’ll want to allocate money into three different buckets: (1) security bucket, (2) risk/growth bucket, (3) dream bucket. The amount you want to allocate to each bucket depends on your risk tolerance, your investing time horizon, your available liquidity, and what your goals are.

You’ll also want to evaluate how well your portfolio is performing compared to the appropriate benchmarks each year. For example, what are your after-fee returns for your large cap holdings when compared to the returns of the S&P 500? If your investments are underperforming for extending periods of time, you’ll probably want to change funds.

In addition, once a year you’ll want to evaluate your asset allocation and rebalance your portfolio if necessary. Rebalancing is generally required if one of your investment “buckets” gets out of proportion relative to the other two.

#6: Thou Shalt Automate Your Investing

Automation is the key to systematizing wealth accumulation and making your financial strategy successful. Every month, money from your paycheck should automatically be allocated (transferred) into each of your investing buckets. How much to automatically deposit depends on the money you have available, what your investing goals are, and what your investing time horizon is.

#7: Thou Shalt Minimize Your Fees & Maximize Your Net Returns

Fees matter! Most people blow thousands or hundreds of thousands of dollars in fees over their investing lifetime and have no idea. They rely on financial “experts” that sell high-priced funds that underperform. You can’t always control your returns, but you can control your fees. If you keep your fees low and focus on your net returns, you’ll be able to obtain financial freedom years earlier than you otherwise would have been able to.

#8: Thou Shalt Not Give Into Fear

Succumbing to fear is a wealth killer. Yes, investing requires risk. Yes, the value of your assets could decrease. Yes, there could be an unforeseen bear market that tears at your portfolio.

But the risk of not investing is far greater than any of these. If you don’t become an investor, then you’ll likely never become financially free. You will likely be forced to work all your life with little to show for your effort. You’ll miss out on years of freedom and living the life of your dreams.

As an added note, if the market tanks, don’t become afraid and sell. Hang in there. It will rebound—it always does. Selling at the bottom of a crash secures your loss, while holding gives your assets a chance to recover. The best booms are always after the biggest tanks. 2008 and 2009 sound familiar? If you hold on to your investments, you’ll be glad you did.

Being afraid of losing money and not investing at all is a surefire way to lose overall.

#9: Thou Shalt Do Thy Due Diligence

Before you ever make an investment, you need to know what you’re getting into. You need to do your due diligence. You need to know your risks, your rewards, your liquidity, your goals, your tax consequences, your asset allocation, your diversification, your portfolio performance, and much more. 

#10: Thou Shalt Invest In Thyself 

One of the best investments you can make is investing in yourself. Jim Rohn said, “Formal education will make you a living; self-education will make you a fortune.” The more you invest in yourself, the more value you’ll be able to add to others. And the more value you add to others, the more financially free you’ll become.

Conclusion

Successful investing is the agent of wealth accumulation—it’s the essential step in becoming financially free. The more disciplined you become at applying the 10 commandments of investing, the better your investments will perform and more financially free you’ll become.

Action Steps

Take action and become an investor! Become a dedicated disciple to the 10 Commandments of Investing.

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