Are you an independent investor? What are some things you can do to increase your investment earnings?<\/p>\n\n\n\n
According to former mutual fund manager Peter Lynch,\u00a0you have a better chance of success<\/a> investing independently than through professionals and firms. If you choose to invest independently, however, you must be aware of certain key rules.<\/p>\n\n\n\n Here are six stock market rules for independent investors. <\/p>\n\n\n\n\n\n\n\n The first stock market rule you have to accept is that investing in stocks entails a great degree of risk\u2014if you\u2019re not OK with that risk, you probably shouldn\u2019t invest, writes Lynch. You may not make a huge return each year, and some years, you may even lose money. However, if you understand this, you can develop the discipline and resilience to stick with your stocks through their ups and downs (rather than selling at the first sign of a downturn), thereby increasing your chances of making a good return on your investment. <\/p>\n\n\n\n (Shortform note: To increase your tolerance for risk in the marketplace, consider allocating some money toward an emergency fund or short-term savings account<\/a>. Having such a fund provides peace of mind when the market\u2019s doing badly and keeps you from rashly withdrawing investments, which Lynch warns against. Your emergency or short-term fund should contain enough money to support you for three to six months.)<\/p>\n\n\n\n Lynch notes that you can further reduce the risks you\u2019re exposed to by educating yourself about the market and developing good investment skills. You might do this by reading books, scouring the financial section of the newspaper, or talking with people who are already savvy investors. You\u2019ll then better understand what qualifies as a successful portfolio and not aim for impossible gains by making unsound investments. <\/p>\n\n\n\n (Shortform note: While there\u2019s truth in Lynch\u2019s recommendation to educate yourself about the market to have the most success, it may also be the case that you should simply start investing, make mistakes, and learn from them. This is because you\u2019re more likely to remember lessons you learned yourself through trial and error<\/a> than to remember lessons you learned from a book. Investing yourself will likely also give you a firmer sense of success and failure<\/a> in the market, allowing you to correct your expectations of how much you\u2019ll make.) <\/p>\n\n\n\n According to Lynch, as an investor, your goal should be to find a tenfold<\/em> increaser<\/em> (what he calls a tenbagger<\/em>): a stock that makes you back 10 times what you invested. A tenfold increaser dramatically improves your return and helps erase the effect of a bad investment. You can find such companies anywhere and probably encounter two to three a year in daily life. <\/p>\n\n\n\n (Shortform note: If you\u2019re an ambitious investor, you might even want to look for \u201cmulti-baggers\u201d: stocks that return over<\/em> 10 times the initial investment<\/a>. However, most stocks considered multi-baggers these days are companies Lynch would probably advise against investing in because they\u2019re not companies you encounter in your everyday life (and that you can understand easily\u2014a point of Lynch\u2019s we\u2019ll cover later in this guide). For instance, Yahoo! Finance recommends investing in Occidental Petroleum Corporation<\/a>, \u201can American hydrocarbon exploration company.\u201d It\u2019s unlikely the average investor has a firm understanding of what this company does and would therefore struggle to follow the company\u2019s progress.)<\/p>\n\n\n\n Only invest money whose loss won\u2019t negatively affect your day-to-day comfort, stresses Lynch. This is because you can\u2019t predict how stocks will perform in the short term (though you can typically predict over 10 to 20 years) and may temporarily lose money you need to survive. <\/p>\n\n\n\n (Shortform note: If you\u2019re still unsure of how much to invest so your daily comfort won\u2019t be negatively affected, consider applying the 50\/30\/20 rule<\/a>: setting aside 50% of your after-tax earnings for needs, 30% for wants, and 20% for savings and investments. This ensures that even in a temporarily unstable market, you\u2019ll have enough to get by.)<\/p>\n\n\n\n When you find a company you like, disregard what the market\u2019s doing and just buy stocks now<\/strong>, insists Lynch. This is because 1) the market will always be in flux and will eventually reverse itself, and 2) any pundit or acquaintance who thinks they know how the market will perform is likely wrong: It\u2019s virtually impossible to predict the market\u2019s future movements accurately. Therefore, it doesn\u2019t make sense to act based on the market<\/em>\u2014instead, act based on how you think the stock<\/em> will do. If the company\u2019s strong, it will do well in the long term, regardless of what the market\u2019s doing right now. <\/p>\n\n\n\n (Shortform note: In The Intelligent Investor<\/em><\/a>, <\/em>Benjamin Graham provides context on why investors love thinking about and acting on market movements\u2014the thing Lynch strongly recommends you don\u2019t<\/em> do. For one thing, investors desire a sense of control over the market<\/a> and dislike the inertia of waiting for the market to change in their favor. Additionally, it requires less thought to simply guess when a market\u2019s at its lowest or highest point than to do thorough research on a company.)<\/p>\n\n\n\n Companies fall into one of six stock types and often change type over time, says Lynch. How you invest in a stock depends on what type of stock it is<\/strong>, and it\u2019s important to understand the type before you invest. This ensures you have correct expectations of that company\u2019s performance and won\u2019t sell a stock in a company type prematurely. <\/p>\n\n\n\n (Shortform note: Lynch stresses the importance of managing your expectations<\/a> of your stock performance by understanding the maximum possible performance of the stock. Expectation management is an important skill to build and apply in all realms of life, including investing, to avoid difficulty and conflict. One piece of advice on managing expectations at work<\/a> is to never assume you or others fully understand a project or topic of conversation<\/a>\u2014always seek clarification to ensure everyone\u2019s on the same page. You might apply this advice to your trading: Never assume you know what an unfamiliar piece of information about a stock means and instead seek full clarification.)<\/p>\n\n\n\n Here are the stock types Lynch lists: <\/p>\n\n\n\n Slow-growth companies:<\/strong> Most companies that start out as fast growers eventually become slow growers. Lynch doesn\u2019t particularly recommend investing in slow-growth companies because you won\u2019t make money fast.<\/p>\n\n\n\n Dependable companies:<\/strong> These are large, established companies that grow more quickly than slow-growth companies but still maintain a relatively slow pace. It\u2019s good to have a few dependables in your portfolio because they\u2019ll keep you afloat in market downswings since they generally aren\u2019t as strongly impacted by such swings as smaller companies are. <\/p>\n\n\n\nRule #1: There\u2019s Inherent Risk Involved in Investing<\/strong><\/h2>\n\n\n\n
Rule #2: You Want to Nab the Tenfold Increaser<\/strong><\/h2>\n\n\n\n
Rule #3: Only Invest Money You Won\u2019t Miss <\/strong><\/h2>\n\n\n\n
Rule #4: Pay Attention to the Company, Not the Market<\/strong><\/h2>\n\n\n\n
Rule #5: There Are Different Types of Stocks<\/strong><\/h2>\n\n\n\n