This is the sequel to the article Personal Finance 101. Before you think about investing, make sure you cover your bases and are financially stable. You can review the previous article here if needed.
Let me start with a disclaimer: I am not a financial advisor and this is not meant to be financial advice. I'm purely sharing my personal opinion. Before you invest any money, check with a professional and be aware of the risk that everything you invest can be lost.
These are the rules I follow for investing, briefly summarized:
Invest only money you could afford to lose. This doesn't mean that you will lose all of it, but not being attached to the money will make you less scared and emotional when investing. If you have a family and need the money to cover your living costs, then you shouldn't invest this money that is necessary for survival. Only invest money you don't need for the next few years.
Think long-term. If you look at most stocks, they increase in value over the long run, or sometimes the very long run. The risk to lose money is higher if you're in it for the quick gains, so I generally invest my money with the intention of keeping it there for the next 5 - 10 years.
Diversify. This is one of the most important rules of investing. You shouldn't bet all your money on one horse because the risk is way too high. To minimize the risk and maximize output, it's advised to invest into different asset classes. A good rule is to build up to 5 different asset classes (e.g. stocks, real estate, cryptocurrencies, precious metals), and not hold more than 25% of your assets in one class.
Keep your emotions out. As soon as you start getting attached to the performance of your assets, get overly excited about your gains or fearful of your losses, the risk of making an investment mistake is high. If you can sit through a dip without getting nervous and selling, often the price will go up again. You only lose money if you sell below your purchase price - if you haven't sold, you haven't lost money.
If you miss one train, take the next one. It's easy to buy an asset at too high of a price out of FOMO because it's hyped in that moment. Don't try to jump on a moving train when everyone is trying to get on. Just keep calm, do your research and get on the next train before it takes off. There will always be a next train.
Dollar Cost Average. When you have decided to invest into an asset, decide on the total amount you want to invest, and then split it into multiple equally sized amounts, which you invest in regular intervals over a certain period of time. For instance, if you want to invest 1000€ in Bitcoin, it's better to invest 250€ every 2 weeks in four charges, rather than investing all of the 1000€ at once. This way you reduce the risk of buying for a price that is too high, and average out the costs of the asset you're investing in.
Are there any other rules you follow when investing? Let us know in the comments!