Four Rules for Investing Success

Peter Lynch is a legendary investor known for clarity in his teaching and simplicity in his writing. In his book One Up, he explains how he invested in Dunkin’ Donuts because of his experience as a customer, not because of Wall Street analysis. Furthermore, in his writing, he distilled much of his teaching into some simple principles.

1. Know what you own. This is the most important principle for investing. If you put your money in a business, you need to understand how the business operates and whether or not it has a future. Many investors recommend owning index funds over individual stocks. Their reason is “diversification.” However, there is a common misconception that index funds are always better than stocks because there’s more risk in an individual stock and because it’s difficult to be a good stock picker. The truth is each method of investing has its advantages and disadvantages. The overarching rule should always be only invest in what you know and understand. If you don’t understand an index of stocks, it’s not smart to invest in them simply because they’re “diversified.” Owning an index you don’t understand isn’t any smarter than owning an individual stock you don’t understand. Do your own research before you invest your money. If you don’t take interest in investing, get a financial adviser. They can explain to you what you own and help you understand it.

2. Don’t try to predict the stock market. Lynch once wrote: “Far more money has been lost by investors preparing for corrections, than actually in the corrections themselves.” No one can predict the stock market, or any market for that matter. The point of diversification isn’t to time the market. The point is to achieve your investing goals with the minimum amount of risk. You can see market trends, and buy or sell investments based on opportunities. Over time you can rebalance your portfolio as the market rises or falls, but don’t think you can time the market perfectly by picking the “optimal moment” to buy everything.

3. Learn from history. History is a good method of learning about investing trends. History shows us that there will be market corrections in the future. It’s a good idea to be prepared both financially and emotionally for these corrections.

4. Time is on your side. This applies to investing in several ways. One is the effect of compounding. If you save regularly, you’ll take advantage of both compounding and dollar cost averaging. Another is patience when it comes to investing in a business. If you take your time to understand a business before investing, it will help you avoid costly mistakes.

Investing can be a challenge, especially in a volatile market. I can help you directly when you join my membership program. You’ll have access to 3 hours of video instruction on the basics of investing, plus I’ll work with you one-on-one to develop a game plan to reach your financial goals.

If you want to educate yourself on the fundamentals of good personal finance, pick up copies of my books The Money Mission, Tax Savings Strategies, and The Blended Retirement System.

Have a great day, and I’ll talk to you again very soon!

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