We invest to earn money. That is why it is necessary to follow some basic rules before investing our hard earned money. These rules are vey basic but if followed, it can prevent us from big shocks/ losses,
Rule No. 1 Cap the downside –
It is very necessary to cap downside. It means limiting the amount you can loose. One big loss can end everything you dreamt about.
In other words, take small risks. Take small risks that can give big returns.
Definitely there are investments that have high risks and high returns. But such investments are not actually investments but just gambling. So avoid high risks as far as possible.
Reasons you should avoid gambling:
Scenario (i) If you win a gamble, you will think about gambling more and more. And this would lead you towards bigger gambling. And once you loose a big gamble , loss will be so big that all your past profits will be wiped out. And obviously you will loose because you can not have 100% or even 50% success rate.
Scenario (ii) If you loose a gamble, you will think about recovering at least the amount initially invested ( just google sunk cost fallacy). And this will lead you to gamble again and again. And once you started making gains, you will follow the above thing again and ultimately end up loosing money.
We must understand that sometimes gambling may make us rich but richness will be there for very short time. “Gambling brings temporary success and permanent failure”.
Rule No. 2 Asset diversification –
It means to put eggs in different baskets. Always diversify your asset so that even if you loose in one asset, you are gaining in other asset to nullify the loss.
Remember that asset class should be limited. Just invest in 5 to 10 different asset class. It is because you focus is limited. You can not focus on 20 different asset classes and so never invest in 20 different assets. “Focus on everything means focus on nothing”.
The above two rules seems obvious. But they are not easy to follow. They looks easy but your greed and fear makes these rules harder to follow. Therefore put your greed and fear in check before investing.