“Let every man divide his money into three parts, invest a third in Land, a third in Business, and a third let him keep in Reserve.” —Talmud
Diversification is the most important principle of investing. It significantly reduces risks and potentially even increases portfolio returns!
Distribute your capital across different geographical areas, markets, and currencies. Don’t invest all of your savings in just one asset class. Distribute them amongst stocks, bonds, real estate, gold, etc. And do not simply pick one favorite in an asset class—you will reduce your risks significantly if there are over 30 issuers in your portfolio.
Also, diversify in time. It’s impossible to guess the perfect entry point. If you don’t go “all in” but rather buy assets systematically, you will average the price in your favor.
2. Focus on risks
There’s a simple principle—don’t lose your money! Think about it, if an investor loses 50% of his capital, in order to get back to the original amount, he needs to now make 100% of what he has left. To avoid this situation, you should, first of all, recognize that stock markets are completely unpredictable. No one, even the savviest professional, can predict the future price of an asset. You can always expect the unexpected. Don’t chase after super high returns, don’t buy what you don’t understand, and always use principle # 1.
3. Positive mathematical expectation
The main condition for an investor to make a trade should always include having a positive mathematical expectation. An example of mathematical expectation that the market will shift in your direction can be buying shares of reliable companies during corrections or a crisis. Long-term investing is another example. Over the past 100 years, there has not been a single unprofitable fifteen-year period in the US stock market. Remember, when investing in stocks, over time, the risk goes down and the probability of making a profit goes up.
4. Taxes and commissions optimization
These expenditures can eat up a large part of the investor’s profits. So what matters is not really the gross profit you’ve made but the net profit you’ve received. There are a number of ways to optimize your taxes. Carefully study the tax exemptions and deductions allowed by the government. There are also capital management strategies that can further reduce your taxes.
It is also worth taking a close look at the commissions for using various investment instruments. For example, there can be a big difference between mutual fund and ETF commissions, so be aware of those.