Investing has long attracted the attention of both individuals and institutions. Some are tempted by the vision of multiplying savings, others – by the desire to secure their financial future. Regardless of the motivation, it is worth remembering that the world of investment is not only a chance for profit, but also a risk. To navigate it consciously, you need to understand the basic rules that help you make smart decisions and avoid costly mistakes. Below, we will introduce the most important foundations that should accompany every novice investor.
Understand the principles of investing – what they are and why they are important
Investing is a process that requires a plan and consistency. Money alone, although it is a basic resource, is not enough – you also need knowledge, patience and the ability to assess risk. The rules of investing can be compared to signposts on the route – they show the direction, protect against going astray and allow you to reach your destination.
Why are they so important? First of all, because emotions are a natural companion of an investor. Fear of loss or greed can overshadow common sense and lead to hasty decisions. Clearly defined rules are then a reference point that makes it easier to keep a cool head. Thanks to them, it also becomes possible to build a long-term strategy – and it is regularity, and not individual “shots”, that is the key to success in the financial markets.
Rule 1 – Build a safety cushion
The first step, before we even start thinking about investing, should be to accumulate the so-called financial cushion. It is a reserve of funds that allows you to survive unforeseen situations: loss of job, illness or sudden expenses. Specialists recommend that it should be the equivalent of at least three, and preferably six months’ living expenses.
Why is it so important? Because investing is associated with risk, and capital invested in the stock market, bonds or funds cannot always be quickly withdrawn without losses. The safety cushion provides mental comfort and allows you to avoid hasty decisions such as “I have to sell shares because I lack my bills”. Only with a solid background can you safely enter the financial markets.
Rule 2 – Define financial goals and time horizon
Investing without clearly defined goals is like traveling without a map – you can go in any direction, but it will be difficult to get to the place you are really interested in. Financial goals should be specific and measurable. These may include, for example:
- accumulation of capital for own contribution to the apartment,
- securing the future of children,
- building a pension fund,
- making dreams come true – e.g. a longer trip around the world.
The second aspect is the time horizon, i.e. the period in which we plan to achieve a given goal. A short-term investor (1-3 years) will choose completely different instruments than the one who plans to build wealth for 20 years. Determining the time and goal allows you to choose the right strategy and the level of risk you can afford.
Rule 3 – Educate yourself
Even the best expert advice or popular articles on the Internet will not replace solid knowledge. Education is the foundation of investing – the more we understand, the lower the risk of making mistakes. It is worth reaching for books on personal finance, following market reports or participating in trainings and webinars.
Education should concern not only the operation of financial instruments (e.g. stocks, bonds or ETFs), but also the psychology of investing. Understanding how emotions work in the stock market allows you to better prepare for crisis situations and avoid panic decisions.
Today, access to knowledge is easier than ever – all you need is the Internet to find valuable sources of information. The key, however, is selection: choose proven materials, based on data, and not on promises of quick profit.
Rule 4 – Choose a regulated broker
The last, but extremely important rule is to choose the right intermediary. A broker is a company that allows us to buy and sell financial instruments. Unfortunately, the market is not always free of fraudulent entities. That is why it is so important to use the services of institutions regulated by appropriate supervisory authorities (e.g. in Poland – the Polish Financial Supervision Authority).
How is a regulated broker different from a random entity on the internet? First of all, the safety of funds. Supervised companies must meet certain capital requirements, maintain transparent accounting, and provide protection mechanisms for customers. This minimizes the risk that the investor will fall victim to fraud or sudden bankruptcy of the broker.
Choosing a regulated broker is a step that may seem like a formality, but in fact it is one of the pillars of safe investing.
The world of investing is fascinating, but it requires responsibility and risk awareness. The basic principles – building a safety cushion, setting goals and a time horizon, continuous education and using the services of regulated brokers – are the foundation without which it is difficult to think about long-term success. Investing is not a sprint, but a marathon. The key is patience, regularity and the ability to learn from both successes and failures. Each step taken on the basis of proven principles increases the chances that our financial decisions will bring the expected results and become a solid support in the implementation of life plans.