Question

Name three investment rules. Detail the mechanics for each of these rules and compare their advantages and disadvantages. Finally, tell us which rule you personally prefer and why.

Answer 1

There are various kinds of investment rules which are to be followed while making investment decisions. These rules of investing need to be followed in order to beat market rate of return and stay in course of being disciplined and staying invested through different economic scenarios.

1). Investment at the early stages of your life-one should start to invest at the early stages of his life, because it will provide him with the benefit due to more time available for compounding and will also offer him the flexible approach because he can choose to invest at various stages of his life so starting to invest early is a very good investment rule,one should follow in order to maximize rate of return because there would be most of the gains through time value of money as there will be high rate of compounding through interest.

if one invest without timing the markets at the top of the market, this principle can lead to adequate destruction of the capital.

2) diversification of risk and maximization of Return-investors should always try to invest through various asset classes in order to maximize his overall rate of return and minimise his risk as investment into various classes will minimise the systematic risk, associated with this investment and it will also eliminate the unsystematic risk which are mostly firm specific risk associated with this investment .

Too much diversification can sometimes be injurious because you will not be able to manage with whole number of assets related to firm-specific risks.

3). Not focusing on rumours and investing for the long term-an investor should always try to focus on the long-term of action and he should not get volatile with the market in order of investment because that will make him change his investment related decision. He should always be investing based upon the fundamentals of the company and he should only change his investment decision if the fundamentals related to the company has changed, so it is all about not looking at the the market noise and focusing on the due course of action.

problem related to this rule is that if you hold onto your investment for long period of time, it can even erode your capital.

I always prefer to diversify my investments so that It can minimise the risk related to my portfolio and I could also get a very good chance for optimising the overall rate of return.