7 Essential Investing Rules We All Should Know

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Jump to category:

1. Start early
2. Keep buying
3. Time in the market beats timing the market
4. Stay calm and invest on during market volatility
5. Know your "why"
6. Win the loser's game: diversify
7. The less you pay in fees, the more return you keep

You don't have to be Warren Buffett or Charlie Munger to invest like them.

Their legendary success is often chalked up to brilliance and unmatched investing skill. But Munger once offered a simpler explanation: "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

Still, many investors struggle with confidence. According to Schwab, about a third of Americans don't feel confident in their investment strategy – and roughly half of those say it's because they lack knowledge.

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The good news? You don't need a secret formula to be successful. Finance experts say that following a handful of basic principles consistently can go a long way.

With that in mind, here are seven essential rules every investor should know. They may not turn you into a billionaire, but they just might help you build the future you want.

1. Start early

sunrise over foggy forest in tuscany, italy

The stock market has historically gone up more than it's gone down. To make the most of that long-term trend, the best thing you can do is start investing early.

That's because of the power of compound interest – earning returns on your past returns. It's what Albert Einstein reportedly called the eighth wonder of the world.

Still, getting started is often "the hardest step to take," says Shaun Melby, certified financial planner and founder of Melby Wealth Management. He notes that people are often "intimidated" and "afraid" of making mistakes.

"But putting a few hundred dollars in a Roth IRA and investing it in a simple S&P 500 ETF is 1,000x better than doing nothing," he says.

Consider this: Nearly four in 10 older adults say not saving for retirement early enough is their biggest financial regret. As the old proverb goes, "The best time to plant a tree was yesterday. The second-best time is today."

2. Keep buying

Close up of buy button on a computer screen

Most people invest through workplace plans like a 401(k), contributing automatically every paycheck. That's not just convenient. It's a strategy known as dollar-cost averaging, where you invest consistent amounts over time, regardless of what the market is doing.

While research shows lump-sum investing generally outperforms over the long run, dollar-cost averaging can help smooth out the ride, especially during downturns, when your money buys more shares at lower prices.

It also has a powerful behavioral benefit: it keeps you investing through both good times and bad.

As Melissa Caro, certified financial planner and founder of My Retirement Network, puts it: "The goal isn't to find the most impressive portfolio, it's to build one you can actually stick with through good markets and bad."

3. Time in the market beats timing the market

A modern hourglass with the sunset behind it.

The goal is to buy low and sell high, but trying to predict when to do that consistently? Nearly impossible.

In fact, some of the best market days tend to occur right after the worst. Wells Fargo found that over 30 years, the 30 biggest up days and 30 worst down days for the S&P 500 often happened close together.

"Let sleeping dogs lie is one of my favorite principles as it relates to investing," says Thomas Van Spankeren, principal and chief investment officer at Rise Investment Management.

He explains investors can buy, sell or hold. It's holding that is often the most advantageous, even though it feels like doing nothing. "Lasting wealth is created in the long game."

4. Stay calm and invest on during market volatility

Of course, sticking with your investments sounds easy… until the market drops. That's when emotion creeps in and investors can panic.

The real problem usually isn't what the market does. It's what the investor does in response.

Since 1980, the average intra-year decline in the stock market has been 14.1%, according to J.P. Morgan Asset Management. And yet, the market still ended in positive territory in 34 of those 45 years, or 75% of the time. So, volatility is normal. And often short-lived.

That's why Thomas Balcom, founder of 1650 Wealth Management, encourages a more opportunistic mindset during market swings. "Whenever there is a pullback in the stock market, long-term investors should consider adding to their investment portfolio," he says.

5. Know your "why"

several multi-colored paper airplanes going in all directions with a yellow airplane flying straight out of the chaos

A number doesn't define success in investing. It's defined by your ability to achieve "why" you're investing in the first place.

When you start with a specific goal, you might realize you don't have to take on maximum risk to reach it. Instead, you can work backward to build a plan that fits. Whether it's buying a house in five years or retiring in 20, your timeline and priorities should drive your strategy.

That's the role of asset allocation – the mix of investments you choose based on your time horizon and risk tolerance.

"Invest for your time frame," says David Haas, certified financial planner and owner of Cereus Financial Advisors. "The danger of ignoring this rule is either that you won't have your money when you need it, or that you will sell out of all your investments in a downturn and not buy them again until after they go back up."

Even the best investment strategies can fall short if they're not aligned with the life you want to live. A plan built around the wrong "why" might look good on paper, but miss the mark where it matters most.

6. Win the loser's game: diversify

Different flavors of ice cream on waffle cones

In his classic book Winning the Loser's Game, investor Charles Ellis argues that long-term success comes not from chasing big wins, but from minimizing losses. He compares investing to amateur tennis: the player who makes fewer unforced errors usually wins.

One way to minimize losses in investing is through diversification. Rather than betting on a single stock, investors spread their risk. Mutual funds and ETFs are common tools for this, offering exposure to a wide range of assets.

"Diversification is highly important for long-term success," Haas SAYS. He explains that buying 100 shares of Nvidia (NVDA) or Tesla (TSLA) is speculation, while building a diversified portfolio and holding it for many years is true investing.

"Your portfolio will be less volatile and you can be assured you will own not just what is going up (or down) now, but what will be going up in the future," he adds.

7. The less you pay in fees, the more return you keep

Blue neon light showing scisscors cutting into the word "fee"

An old Wall Street adage goes: There's no such thing as a free lunch. Every investment comes with costs, and those costs come straight out of your return.

The average mutual fund fee is around 0.4%, but some funds charge over 1%, according to the Investment Company Institute. That might not sound like much, but over time, even small fees can compound into thousands of dollars lost.

Some fees don't directly benefit investors. Sales charges (loads) and 12b-1 fees, for example, are used for marketing and distribution.

Legendary investor John Bogle put it plainly: "In investing, you get what you don't pay for. Costs matter."

Getting the basics right can make a big difference. But it also pays to keep learning, especially as your life and financial needs change.

Think of this as a bonus rule.

"When it comes to investing, staying sharp on strategy in real time pays dividends over the long haul," says Paul Penke, certified financial planner and portfolio manager at Ironvine Capital Partners.

Or, as Ben Franklin once said: "An investment in knowledge pays the best interest."

If you're reading this, you're already off to a good start.

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Jacob Schroeder is a financial writer covering topics related to personal finance and retirement. Over the course of a decade in the financial services industry, he has written materials to educate people on saving, investing and life in retirement.

With the love of telling a good story, his work has appeared in publications including Yahoo Finance, Wealth Management magazine, The Detroit News and, as a short-story writer, various literary journals. He is also the creator of the finance newsletter The Root of All (https://rootofall.substack.com/), exploring how money shapes the world around us. Drawing from research and personal experiences, he relates lessons that readers can apply to make more informed financial decisions and live happier lives.