Five Great Investing Rules

I was thinking what my top five rules for investing might be, but there have been so many good ones from so many great investors over the years its very hard to select the best. So here, instead, are just five rules that I think everyone should follow (and next time you ask me I might pick a completely different five).

Rule 1: Never lose money

This might sound obvious, but its Warren Buffetts rule number 1 (and his rule number 2 is, famously, Never forget rule 1).

Most people who start out investing in shares are focused on how much they can possibly gain. They look at past successes and want some of it, and they go seeking the shares they think will have the biggest upsides. But the shares with the best growth potential are usually also the riskiest, and if you get the wrong ones then you could be exposed to some nasty downside too.

If youre investing your hard-earned cash, your first focus should be on how to preserve it and the companies that are best at preserving cash, strangely enough, usually turn out to be the best at growing it too.

Rule 2: Keep Your Costs Down

If you invest 1,000 in shares its likely to cost you around 15 in broker charges and stamp duty, then youd have to pay around another 10 to sell. The spread between the buying and selling price has to be considered too, and that can vary a lot a FTSE 100 company will have a very small spread, but smaller AIM shares can carry spreads of 10% or more.

In all, you could easily be looking at a 5% hit for every buy/sell cycle, and that will quickly kill any profits if you trade too often so dont over-trade, and keep the costs down.

Rule 3: Dont try to time the market

Do you watch share price charts and try to guess where the price is going next and try to get in at the low point? Does it upset you if a share falls after youve bought it or rises after youve sold it? Youre making a big mistake.

Trying to time the market is a mugs game, and none of the investment greats place any store in it if it was easy to do then theyd certainly be doing it.

Rule 4: Invest on fundamentals alone

This is the flip side of Rule 3 really, and says that the only thing that counts when making an investment decision is a companys fundamentals. Is it in a safe business? Does it have a good track record? Is it growing its profits? Does it pay healthy dividends supported by strong earnings?

If you can buy shares that satisfy these criteria and can get them at a favourable share price valuation, youll almost certainly beat the chart-watchers.

Rule 5: Investing is forever

This is one of the best rules of all. When you look at a share, dont buy it for a quick profit, dont buy if you think you might sell after a year. In fact, dont buy with any time horizon at all buy with a view of holding forever.

Of course, fundamentals can turn bad and selling might become a good idea, and this rule doesnt mean you should actually never sell just only buy shares that, at the time, look good enough to keep for ever.