It seemed appropriate to borrow and adapt the title of one of the books that have most influenced both my work and personal life, "The 7 Habits of Highly Effective People", by Stephen Covey. A reference book in the world of personal management reading.
As we all know, habits are acts that structure our lives, to the point that we have them so internalized that we often do them unconsciously. As Horace Mann said, “Habits are like strands. If we braid them on a rope day after day, it will soon be unbreakable ”, as long as we dedicate effort and commitment on our part to achieve it.
When it comes to investing the money that has cost us so much effort to earn, we must internalize a series of habits that will help us to be more effective in making our capital profitable, in any area in which we want to invest: real estate market, stock market, products financial, cryptocurrencies, startups or Crowfunding.
1 - Get started as soon as possible: In general, we usually spend a lot of time thinking about it before starting a certain investment, we do not finish deciding, it is difficult for us to take that first step, since, on many occasions, it implies us leaving our comfort zone. If we talk about risking our money, even more so, that is why the first habit that we must develop is to start as soon as possible. When talking about investments, time is our best ally. The longer we are in the market, the more profitability we will get, and therefore, the more we can benefit from compound interest. All the time we let go of is an incalculable opportunity cost on the appreciation of our savings.
2 - Don't invest in something you don't understand: Although it is common sense, we should not invest our money in something that we do not understand how it works, call it: company, fund, broker, exchange or startups. It is important to know well what we are investing our money in, how much we lose in commissions, if they are generating benefits, why and how it generates them. To do this, we must study in depth where we are going to invest. This habit will allow us to sleep peacefully, knowing that we know where we have put our capital and knowing the risks that it entails.
3 - Do not time the markets (Buy & Hold): It is very common that once inside the world of investments, we try to time the market waiting for the precise moment to enter or exit. If we think that the market is too high to buy and we decide to wait, or on the contrary, we believe that since it is high, it is the right time to sell, and then buy cheaper again, the market, in general, makes us stay out of. No matter how much we inform ourselves, nobody knows how the markets will behave in the future, therefore, the most profitable strategy is Buy & Hold. Time in the market will always play in our favor.
4 - Be regular with investments (Dollar-Cost Averaging): When investing, in any of the modalities in which we are most comfortable, we must be regular, establishing a method. One way to seek regularity is to allocate a fixed amount of our income, and mark a time window each month, to invest repeatedly. In this way, we will protect ourselves from possible market volatility, since we will be applying the well-known Dollar-Cost Averaging, buying both at high and low moments, and most importantly, it helps us control the impulses derived from the emotional part, abstracting ourselves from the noise engulfing the markets.
5 - Do not invest capital that we may need in the short term: At this point common sense re-enters, but as in investments the emotional factor has a strong presence, and sometimes emotions block our common sense, we must always bear in mind that markets are totally unpredictable, so all investment , carries a risk. That said, we should not invest 100% of our capital, it is necessary to always have liquidity for possible emergencies, as well as to be able to face commitments that we have in the short or medium term.
6 - Do not be influenced: Today we live surrounded by excessive noise that reaches us through the media and social networks. This continuous bombardment of information can lead us to make wrong decisions when investing our capital. Although it is difficult, when deciding where and when to invest, we must abstract from all the noise around us, and have the confidence to decide for ourselves. For this, it is important to see what others are doing in perspective, trust our analysis and research, and thus create our own opinion.
7 - Diversify: The last and no less important habit is to diversify our investment. No matter how much information we have, there is no investment that is totally safe. The diversification of our investments will minimize the impact on our portfolio in times of crisis, and therefore, prevent us from losing all of our capital if the context turns negative. For proper diversification, it should be divided into different types of assets, different sectors and different geographical areas.
With these seven habits, I have tried to summarize the guidelines I follow when investing in equities and fixed income, as well as in the world of cryptocurrencies. In order that we can all learn together, I would like to know your opinion, and know what other habit I could add to the previous list, for safer and above all profitable investments.
Thank you very much for your time.
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Thanks for this wonderful post.