Investing in the stock market can be both exciting and daunting. Trying to figure out what you need to know, let alone actually doing it, can be intimidating for an individual investor – especially one who is just starting out. The reality is that becoming a successful investor isn’t rocket science; on the contrary, following some simple rules of thumb will put ordinary investors many steps ahead of their lackluster peers. In this blog post, William Schantz discusses the top rules that every mediocre investor needs to keep in mind if they want to increase their chances of success in the stock market. So come along as we uncover all of these helpful tips and get one step closer to achieving your financial goals!
William Schantz Lists The Rules Every Mediocre Investor Must Know
Rule 1 – Invest Regularly: The best way to make sure you don’t miss out on potential returns is to invest regularly, says William Schantz. Making regular investments — such as through an employer-sponsored retirement plan or a systematic investment plan (SIP) — takes the emotion out of investing and helps maximize your results over time. Data shows that a SIP can increase your chance of achieving market-beating returns by up to 32%. An example of this rule in practice would be to set up a monthly transfer from your checking account into an index mutual fund, which tracks the performance of the whole stock market.
Rule 2 – Diversify Your Portfolio: Even if you have done careful research and chosen what you believe are great stocks, there is still the risk that one or more of these stocks will underperform. To mitigate this risk, it’s important to diversify your investments by including different asset classes (such as stocks, bonds, and cash) in your portfolio. It’s also important to diversify within each of these asset classes — for example, by investing in a variety of different sectors and company sizes. According to data from Bloomberg, an optimally diversified equity portfolio can reduce overall investment risk by 25% when compared with an undiversified portfolio. An example of this rule in practice would be allocating a portion of your investments across different types of assets, such as large-cap stocks, small-cap stocks, international stocks, government bonds, and corporate bonds.
Rule 3 – Rebalance Your Portfolio: Rebalancing is the process of periodically readjusting the asset allocation of your portfolio to make sure it reflects your desired mix of investments. This is important for two reasons: First, it helps ensure that you are not taking more risks than you are comfortable with. Second, research indicates that rebalancing can also improve longer-term performance by ensuring that your portfolio stays within your target asset allocation and minimizing unnecessary trading costs. Data shows that a quarterly rebalancing strategy can increase returns by up to 1%. An example of this rule in practice would be periodically reviewing your portfolio and selling the investments that have become disproportionately large (or buying the ones that have become too small) so as to restore your desired allocation.
Rule 4 – Minimize Investment Costs: Investing costs include brokerage commissions, fund management fees, taxes, and more, says William Schantz. All of these costs can have a meaningful impact on your returns over time. Research shows that for every 1% increase in fees you pay, you can expect to lose up to 2% in returns. To minimize the effect of investment costs, it’s important to select investments with low fees and avoid trading too frequently. Data from Vanguard Group indicates that investors who take an index-based approach and limit their trading tend to outperform those who take a more active approach by 0.75% annually. An example of this rule in practice would be selecting funds based on cost rather than past performance and limiting the number of trades you make in a year.
William Schantz’s Concluding Thoughts
Learning and understanding the rules every mediocre investor must know is important, as they form the bedrock on which all successful investments are made. Indeed, these rules offer guidance on how to navigate the stock market and ensure that one gets the most out of their investments. It is essential, as per William Schantz, that novice investors research thoroughly and ensure they have a comprehensive understanding of these rules before venturing into the world of investing. Additionally, experienced investors should also strive to keep abreast of any changes in these rules to stay ahead of changes in the stock markets. Ultimately, abiding by these guidelines will be instrumental in helping anyone achieve their financial goals through successful investing.