Whenever we talk about success, there’s one word that everyone likes to bring up – mindset. The problem is that these same people have a tough time defining what this mindset consists of.
If mindset were an organ, principles would be the tissues that make it.
The world of investment is not an exception.
Investing requires more than just making the right decisions. It requires you to make the right decisions over and over again. You must make these right decisions even when they are not obvious or appear counter-intuitive.
With that in mind and without further ado, here are the top five investment principles to help you get into the right mindset.
Diversification of income sources
Putting all your investment money into a single asset is incredibly risky. Everyone knows that. However, most people are unaware that putting all your money into a single asset type can be just as risky. Sure, it’s more likely for a single stock to crash than for the entire market, but it’s not like this hasn’t happened before.
So, instead of putting all your money in stocks, put 10-20% in commodities. Precious metals like gold are a great investment idea, but you can also invest in something less common (like platinum or palladium).
You can also put some of your money into real estate. Even if you can’t afford an entire building, you can look for trusts investing in real estate or find the right syndication. This way, you’ll get a cheaper buy-in.
You might also want to invest some money in crypto. There are many new opportunities to realize a large return this way. Volatility is always a problem, but there’s a way around it. The risk should be minimal if you don’t overinvest (invest more than you can afford to lose).
Finally, you can spend some of your money on art or collectibles. Alternative investment options are a criminally underrated category, and you should never ignore them.
Risk is relative
This is a topic that we’ve brushed on already. If the investment money is not too big, no risk is ever that terrifying. However, the risk is always relative.
Imagine if someone asked you if the price of $1,000 is too high. What would you tell them? The only correct answer is – it depends! For a video game, it’s too much. For a car, it’s a little investment. For purchasing a property, it’s a ridiculous sum.
The thing is that you need to observe the risk through the lens of potential reward. Would you invest $10 for a 1% chance of earning $11? Probably not. Would you invest $10 for a 1% chance of earning $100,000? Absolutely!
So, you need to master the art of risk management. This is the same in the business world and investment. Generally speaking, there are three levels of risk:
- Risk appetite: You’re willing to take this risk. If someone told you that you could lose your entire investment, you would be completely fine with it (if it falls within this sum).
- Risk tolerance: This is an acceptable level of risk. You’re not too happy with it, but it wouldn’t be the end of the world even if you fail.
- Unacceptable risk: Finally, this is the zone that you should never venture into.
Understanding where your risk falls lets you know exactly how to position yourself.
Research makes all the difference.
If you’re investing in a stock of a company that you know nothing about or buying crypto without understanding the basic principle, you’re not investing – you’re gambling.
The only way to avoid gambling and make sensible investments is to learn how to do quality research.
First, you need to understand the asset type. You’ll need a reference point when you start reading about the stocks. You need to understand how dividends work and what’s standard practice. You also need to learn about different types of long-term investments (versus day trading, for instance).
You must also research to pick the right trading platform (exchange). You must list a few viable candidates, compare their features, and test them.
If you plan to invest in crypto, you have even more reading to do. It would be best to understand the teams and technologies behind them.
The most important part is that you find the right learning materials. So, research the available blogs, newsletters, and studies and start reading/listening. Becoming an investor is more work than you expect. If you want to make it in this industry, you have to commit.
Understand the psychology behind trading.
People say you should never buy when emotional; however, exploring these emotions and their psychological phenomena is far more useful. For instance:
- Positive bias is a concept where people are more likely to believe that good things will happen. People are more likely to believe that positive trends will run immediately. This is why, as soon as BTC passed the $10k mark, everyone started talking about how long it would take to pass $100k.
- Survivorship bias is when you base your conclusion on the selected sample. For instance, you’re likely to believe that everyone made millions on a certain trend just because you hear the story of everyone who made it. People who invested and failed tend to stay silent about it. Some out of shame, while others would rather not relieve this.
- FOMO (fear of missing out) is the idea that if you miss a current trend, everyone will get rich but you. So, you rush to invest and hop on this bandwagon before it’s too late.
Why is it so important to understand these concepts? Well, because they affect other investors. Since, in some instances, you’re betting against them, this can make your assessments of future trends far more accurate.
The market is emotionless but is made out of humans guided by their emotions. So, how is the market not guided by emotion and basic human psychology? Make sure you base your decisions on facts, research, and these concepts, and you should be fine.
Start using stop orders.
Previously, we’ve talked about trading while pressed by various psychological factors, but what if it doesn’t have to be that way? What if you could program your exchange to sell or buy once the X asset reaches Y price?
This would make the process a lot quicker, but it will also eliminate any temptation.
- The stop market order will send an order to buy or sell an asset when the specific price is reached.
- On the other hand, stop limit order is a bit more complex. It works by combining a stop price and a limit price.
There are a few problems with this principle. First, the market doesn’t have to behave how you expect it to. This means that just because you prepared the algorithm for a certain scenario, it doesn’t mean you’ll ever face these circumstances. You must know the market well enough to understand the appropriate stop prices.
Second, you can’t just set them up and forget about them. Conditions change, and you need to adjust your orders.
Also, imagine an unforeseen scenario in which this order hurts you. These are all the risks you must accept before making these orders.
You can easily make the right trading mindset with the right trading principles.
To achieve perfection, you need to do many small things right. Applying the same principle lets you easily turn these orders into the right mindset.
You must understand the risks of keeping all your investments in one asset type. While talking about the risk, you should acknowledge that risk is relative. If the risk is proportionate to a reward and you don’t overextend, there’s nothing to worry about.
Most importantly, you should never shy away from research. Regardless if you’re reading about the company whose stock you intend to buy or learning about the psychological principles that affect people while investing.
Finally, you should automate as much of your buying process as possible.
