5 rules for a sound start to investing

A friend of ours is in his mid-40s and is just beginning to think of investing in stocks. These five common-sense rules will help him get a sound start.


Here are five rules every beginning investor should memorize.

It’s all too easy to overlook investing in stocks in your younger years. In fact, that’s just what happened to a friend of ours.

Our friend was so busy getting his business going, paying off the mortgage on his house and helping raise his family, that he had little time to think about stocks. Now, however, business is good despite COVID-19, he’s paid off his mortgage, his children are on their own—and our friend wants to invest some of his $250,000 savings in stocks.

But being in his mid-40s, our friend admits that it’s getting a little late for him to learn about investing by trial and error. We feel he can eliminate many potential errors if he remembers these five common-sense rules.

1) Set priorities. This involves reviewing your financial situation and deciding just how much you can afford to invest, and exactly what you want your investments to do for you.

Our friend, for instance, wants to keep about $100,000 of his savings in liquid investments in case his business develops a sudden need for additional cash. Suitable places for him to put this money include high-interest savings accounts and term deposits. These investment vehicles certainly don’t yield much, but he will at least sleep soundly knowing that his principal will be available anytime he should need it.

Our friend figures he can safely invest the other $150,000 or so. He wants a combination of income (most of which he will re-invest in stocks as well) and long-term growth. He also wants to pay attention to the safety of his investments. The Investment Reporter Key stocks listed in our monthly Investment Planning Guide include some good choices to meet these goals. Many of them offer regularly-rising dividend income.

2) Keep records. Most of us have heard of the investor who wants to make a specific investment, but can’t—perhaps because he or she tied up all of his or her money elsewhere. This investor may have the money invested in a Guaranteed Investment Certificate that matures five years from now, for instance.

You can avoid this situation if you are diligent about keeping records. This helps you remember all the terms of your investments—and provides records for tax purposes. In fact, that’s why, twice a year, we urge you to complete and keep up to date our one-page summary.

Our friend developed good record-keeping habits when he was building his business. So this should pose little problem for him.

3) Plan your portfolio. Prudent investors plan their portfolios very carefully, so that they can maintain the right balance and diversification for their own objectives.

For investors such as our friend, proper planning also involves stressing high-quality stocks—such as those we rate ‘Very Conservative’ or ‘Conservative’. They’re less likely to have the kind of prolonged setback our friend wants to avoid. There’s also less chance of this if you stress value over vague long-term predictions.

4) Exercise self-discipline. It takes self-discipline to resist the ‘hot tip’ from your broker or the high-yield (commonly know as ‘junk’) bond that doesn’t quite match your investment objectives. You will usually do far better in the long run, of course, if you do stick with investments that match your objectives.

Also, it takes self-discipline to give your stocks the time they need to turn increasing earnings per share, dividends per share, cash flow per share and sales per share into a higher share price.

5) Review your objectives. The investment objectives our friend sets at the beginning aren’t likely to be absolute. The same holds true for you. You may concentrate on growth when you start out, for instance, and then switch to focusing on income and the safety of your capital as you grow closer to retirement age.

This is an edited version of an article that was originally published for subscribers in the June 4, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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