Now when most people hear the word “rules,” they tend to think of it as a negative. Rules sound confining and restrictive — and no one likes to be held back or constrained by rules. We like to be free.
So here’s what’s so strange about financial rules. When you follow them properly, they actually simplify your life and give you MORE freedom.
At the same time, the rules below may likely go against what you think you already know about investing. So your brain is actually going to rebel against them.
That’s why you may want to print out these rules and review them a couple of times a day over the next week or so. If your mind tries to challenge the truth in these rules, that’s fine. It’s all part of the learning process.
Still, the sooner you can internalize these rules, the sooner you’ll become a better investor.
How can we be so sure? Well, these are the same rules used by the greatest investors of all time like Warren Buffett, Peter Lynch, George Soros and many, many others.
On the other hand, these rules are almost all broken by amateur investors, and they pay very dearly for it (as Garrett can confirm because he used to break them too).
So following these rules faithfully will save you a lot of pain and suffering in your investing and gives you the best chance to boost your returns significantly.
RULE #1: Risk is NOT in the investment, it’s in the investor
That sounds like a little sound bite, but if you learn it well, it is really the most important investing lesson you can learn.
If you are an expert in a particular investment and it is something you love and are good at (it feels “easy”), then there’s very little risk for you to invest most of your money in that one investment.
On the other hand, someone who doesn’t know anything about that same investment could be taking a HUGE risk putting any money into it.
Why? Because they may not know how to recognize or adjust when the investment starts changing or going bad.
So an investment may be relatively “safe” for a professional investor — but the same investment could be risky for an amateur investor because it’s outside of his area of expertise and knowledge.
RULE #2: Know what you want
This sounds obvious, but most amateur investors invest in things willy-nilly and without a plan. For every investment you make, you should know beforehand what you want to accomplish. Professional investors always have a specific plan for every investment. So should you.
RULE #3 Be accountable
This doesn’t mean you will always be RESPONSIBLE for failed investments. What it does mean is that you will always hold some level of responsibility with every investment, because it’s up to you to assess all risks going in. So it’s ultimately on you if you didn’t have a plan to deal with the contingencies that may occur one or two years into an investment.
RULE #4 Invest in alignment with your strengths (your investor DNA)
Essentially, find things you are passionate about and that meet your objectives and align with your Soul Purpose (something we help you identify in our “New Rules to Get Rich” program).
RULE #5 Invest in what you know well
This goes hand in hand with rule #4 — but it’s amazing how many people invest in things they know nothing about. Being passionate about something isn’t enough. Get educated about it first before you take the plunge to invest in it.
RULE #6 Be patient and willing to say NO to an opportunity
Too many amateur investors love to rush into every investing opportunity they see. The pros wait patiently for GREAT opportunities.
For example, Warren Buffett owns 200 million shares of Coca-Cola and it is one of his most famous investments. Here’s the thing. Buffett didn’t buy Coke in little bits and pieces over time (dollar cost averaging). Instead, he always bought huge chunks of shares when the price was right — sometimes waiting 5-7 years between purchases.
Be patient for GREAT deals where you are knowledgeable and passionate about the investment.
RULE #7 Always have an exit strategy
People like to talk about “buy and hold” as being a great strategy. Everyone always points to Warren Buffett as the model for that. Now if you truly model how Warren Buffett invests, you quickly find that his way of doing “buy and hold” is completely different than what most people think he’s doing.
The fact is — all professional investors (even Buffett) have exit strategies. They know the signs to look for and when to get out.
And while Buffett does have some stocks that he never plans to sell, it’s part of a bigger strategy because he’s dealing with a company that will outlive him by many generations. You don’t have that luxury, so you’re going to be much better off with assets that produce cash flow you can use now rather than trying to blindly “buy and hold” hoping for future gains because a financial planner told you to.
Use these 7 Investing Rules with Confidence
These rules will help you — if you follow them.