Towards the beginning of my investing career, I read somewhere that it was important to come up with your own list of investing rules, and then stick to those rules for a long period of time. This would help you be more consistent with your financial decisions, and can partially take the emotion out of investing.
For example: I had decided for a time to invest in individual stocks. I went through a large number of research sites, and finally came up with what seemed to be a solid list of companies to invest in. I took my IRA which had just rolled over from my company, and put my $40k into these stocks. The stocks were what are often called “falling knives”. In other words, they were in the process of sinking fast, and I was trying to catch them on their way down. The idea was that they were likely to go up later, and I wanted to catch that gain.
Of course many of those stocks continued to fall, and I chickened out and sold a month later, losing over $5k of my $40k investment. I dropped all my cash into an index fund. A couple of months later I checked on those stocks, and without exception they were higher than my purchase price. If I had just followed my own plan, I wouldn’t have lost a penny. My index fund did eventually pull me back past my initial investment point, but how much more would I have had if I’d just stuck with my initial plan?
So without further discussion, my current investing rules:
Do not purchase individual stocks
I partially believe in the efficient market theory, to the level that I’m sure there are plenty of people in the world who know more about these stocks than I do. If the stock fell “for no good reason” yesterday, likely there really is a reason.
I don’t want to get into the habit of buying & selling stocks back and forth. This is very inefficient, and I’m no good at it. If I own whole markets, I’m much less likely to panic and run from them.
Stocks falling in price is a good thing, so don’t sell
It is hard to get used to the idea, but when the stocks I am purchasing fall in price, this is good for me. I am still in the accumulation phase of investing. If stocks go up, I’m buying them at a higher price. If stocks go down, I’m buying them at a lower price.
- Example:
- You invest $1,000 per year in a stock that costs $10 per share. If the stock jumps up to $20 per share after 5 years, you will have 750 shares after 10 years, or $15,000.
- If the stock drops to $5 per share after 1 year, and then comes back to $10 per share after 10 years, you will have 1900 shares, or $19,000.
Lower priced = Lower P/E (especially when we’re dealing with index funds). This means that my investment is actually less likely to drop, than a stock priced at a premium.
Purchase only when your commission is less than 1%
This is not difficult at all if you’re using a discount brokerage. Lets say my commission is $10. That means I need to make sure I’m always investing at least $1,000 per purchase.
Just imagine your stock fell 1% in price as you purchase it. Purchasing when it costs more than a 1% commission is that much more of a drop in price, therefore it takes that much more of a gain before you even break even.
Buy only index funds, and preferably in large markets
I try not to time the market, or pretend I understand where the economy is going. So I don’t want to buy large amounts of a healthcare fund, or bank stocks because they’re cheap right now. I want to buy large market index funds, such as “whole market index”, “international value”, and so on. Again, if I try to predict where a market/stock is headed, if I turn out to be wrong, I’m likely to sell it in a panic, rather than letting things correct over time.
Buy only with limit orders, not with market orders
This is just from personal experience. I’ve seen a stock trading from 10.05 to 10.15 all day long. I put in a market order to purchase, and what happens? I end up with a purchase price of 10.35. I look at the stock, and I can see a tiny blip in the graph where it jumped up to 10.35 for a few seconds (probably just my purchase). So now I set a limit order at the current stock price (or perhaps a few cents more to make certain my order is placed). I don’t time things, so if my order is not filled, I won’t cry, I’ll just get the stock the next day. Sometimes for less, sometimes for more.
Check on my accounts once per month
The way I do this check is that I update our NetworthIQ homepage monthly. While updating our balances, it involves me logging into each account we own (retirement, HSA, checking, etc) and checking the current balances.
I don’t want to check more than once per month, because I’m in index funds. If the whole market jumps or falls day by day, I shouldn’t care. I’m investing for the long term.
I don’t want to check less frequently, because I want to make certain that nothing strange has happened with my accounts. They haven’t emptied, they haven’t grown strangely large, and they haven’t changed names to Fredrico Fernando and been transferred to Puerto Rico. Basically, it’s just to check to make sure everything is ok.
I’ve also found that when I’m consistent with my monthly balance checks, I’m also pretty good about keeping an eye on my finances in general. It is a monthly reminder that I should perhaps increase the amount transferred to the accounts, spend a bit less, etc.