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Four principles to use and never forget when investing in shares

by , 17 July 2015

Investing in shares can be a bit of a rollercoaster ride. When the markets are doing well, you're happy. When they're sliding, you're worried.

But if you keep a few vital principles in mind when investing in shares, you're sure to do well over the long-term.

The basis of these principles is going with the flow of the market. You need to understand there's no point in fighting it.

Read on to uncover what these principles are…


Investing in shares principle #1: Think long-term


You shouldn’t approach investing in shares as a short-term venture. If you focus on the long-term, you’ll gain from the stock market’s upward bias, Keith Fitz-Gerald in Money Morning US explains…

Don’t believe that what’s happening now is going to happen in the future. Historically, stock markets rise over time.

Investing for the long-term is your best bet at making money by investing in shares. Accept the stock market has its downturns.


Investing in shares principle #2: Understand reversion to the mean


Reversion to the mean means that shares have an average rate of return they may deviate from, but will return to over time.

For example, if Company ABC returns 8% a year on average for 20 years, but returns 20% this year, reversion to the mean suggests the share price will make a smaller climb the following year to return to its average return.

This isn’t always the case, but unless an improvement in returns is sustainable, it tends to be the case.


Investing in shares principle #3: Don’t try to time the market

 
Investors who try to time the top or the bottom of the market are usually wrong. Don’t be tempted to try to do it.


Investing in shares principle #4: Understand stock market volatility


The stock market can be volatile and this means you need to have strategies in place to deal with it, such as using trailing stop losses.

Don’t let impending volatility lead you to dump your shares and run. You just need to know how you’re going to handle it.

So there you have it. Four principles to use and never forget when investing in shares

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Four principles to use and never forget when investing in shares
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