12 Fundamental Rules of Investing
One thing I cherish most about what I do is getting to see people move in the clockwise (from the left to the right side) direction of the Cashflow Quadrant.
The process of graduating from being a self-employed or salary earner to a professional investor or business owner is just like that of turning a big trailer into a colorful butterfly. It really takes effort, time and a complete revolution in character and mindset.
Some of these character effects include knowing the right thing to do when you happen to get some money unexpectedly. Whether you made it from freelancing, borrowed, got a donation, or made it from any considerable source, the trial for the people on the left side of the Cashflow quadrant could be to follow traditional advice about how they’re going to spend it.
Such traditional advice could be to keep on living below your means or simply to boost your contributions to your 401(k). I’ve come up with a series of posts about these ideas and it shouldn’t be surprising that I do not cherish any of them.
If you’re getting some unexpected money, the best thing is to invest it the way Robert Kiyosaki taught in his book.
But for you do this, you must come to realize some fundamental rules of investing. Here are 12 rules of investing, as taught by Robert Kiyosaki.
Fundamental Rule #1: Identify the Kind of Money You’re Working for
Some people only think about earning money. They do not understand that there are various types of income to work for. For a while now, Robert taught that we do have three types of money:
Portfolio income: This type of income is majorly earned from paper assets like bonds, stocks, mutual funds and all of that. It’s the second most-taxed income, and is fairly difficult to get wealthy due to the low ROI.
Ordinary earned income: This type is majorly earned from any common job through checks. It’s the most-taxed type of income, and therefore, is the most complex way to get wealthy due to heavy taxes and also to the fact that time is being traded for money. Your potential to make money is dependent on the length of time in which you can work.
Passive income: It’s majorly earned from royalties, real estate, distributions, and so on. It’s the type of income that only attracts little taxes, with a lot of tax benefits, and is the simplest type of income to create wealth with for its potentially unending returns and low taxes.
Robert Kiyosaki said, you should rather work for passive income, if you wish to build wealth in a lifetime.
Fundamental Investing Rule #2: Turn Ordinary Income into Passive Income
Many people start out by living on ordinary earned income as a salary earner. The way to creating wealth begins with realizing that there other income types and, so, turning your earned income into other income types as proficiently as possible.
When you get a pay rise, it’s not even advisable to live below your means or invest that into a 401(k), which significantly requires saving it. Instead of that, I can advise you to take care of yourself first and later put the money into cash-flow assets. In summary, have your pay rise turned into passive income.
Fundamental Investing Rule #3: The Investor Symbolizes the Asset or Liability
A lot of people thought that investing has a risk. The truth, therefore, is that it is the investor himself who can be said to be risky. He’s the asset or liability.
Experientially, Robert said, a lot of investors have lost so much money when others are earning it. And as a matter of fact, a safe investor would love to go after a more insecure investor due to the fact that it’s where real investment negotiations are usually found.
In order to get transformed from being an insecure investor into a safe investor, invest first in your monetary education. Start very little with investing, as part of your monetary education, knowing that nothing goes beyond real-life experience, learn from your past mistakes and failures, and then make larger and larger investments.
You can as well engage in games that replicate investing so as to become more financially bright.
Fundamental Investing Rule #4: Get prepared
Some people attempt to forecast when things will happen and what will exactly happen. However, a honest investor gets prepared for things to come up. If you don’t get prepared with experience, education, or additional cash, a lot of opportunities will pass you by. This was a statement by Robert Kiyosaki.
Robert continued saying that it was most significant never to forecast what will come up but rather to focus deeply on what you desire, respond to opportunities, and be on the lookout for whatever will be happening in the nearest or far future.
Fundamental Investing Rule #5: Awesome Deals Trigger Money
Some of my biggest interests as a newbie investor were simply how I would be able to raise the needed cash in case an awesome deal comes my way. Robert once stated for a reminder that my duty was just to remain focused on the numerous opportunities that are before me right now, and to get prepared as well.
He said, if you are well-prepared, meaning that if you’re experienced and educated, and an awesome deal comes all of a sudden, the money will surely get to you or you’ll get the money.
Robert’s viewpoint was that being able to get the money was the simpler part of it. The difficult part was trying to get an awesome deal that triggered the money – which is the basic reason most people are willing to give cash to a safe investor.
Fundamental Investing Rule #6: Learn to Measure Reward and Risk
As you turn out into a prosperous investor, you would have to measure reward and risk. Robert Kiyosaki used the illustration of a nephew constructing a burger stand.
He said, if you’ve got a nephew with a skill for a burger stand, and such requires up to $25,000, was that going to be a cool investment?
“Not at all, I responded. Too much risk is involved for too little reward”.
Then he replied and said, “Very nice”. He further said that the nephew has been an employee of a burger chain for over 15 years, has been an executive at every vital area in the business, and is always willing to be up and doing on his own and construct an international burger chain. He further said, what if you could afford to purchase a little proportion of the company with only $25,000? Of what interest would that be to you?
I replied, yes, knowing that there’s much more return for the equal portion of the risk. Mastering and learning the investing rules requires a long-lasting investment in monetary education. However, these fundamentals will help you get started. So, how and where you go is within your decision.
Fundamental Investing Rule #7: Do Not Pay Anyone to Have a Loss
Losing your money because you want to hire someone is not a good idea to go by. However, this can happen if you carelessly find that you didn’t hire the right monetary advisor – someone who doesn’t clarify the rewards, risks, and charges connected with the various kinds of investment.
You need to learn the good way to either perform the hard work, or manage cash on your own, just as you would do while choosing some other experts, as well as choose the right financial advisor carefully.
Fundamental Investing Rule #8: Draw a Financial Plan
Proficient investing is not a quick process. It’s a process that enables investors to accomplish specific monetary goals through a thoughtfully organized financial plan, which includes financial factors, and a tactic for focusing on monetary products that help you combine your objective with those factors.
This implies that numerous investors may have to implement and come up with different investment tactics. Newbie investors, for example, may subscribe to put money into liquid assets, as such money can be utilized in the future to take care of education or to be used to make a deposit in buying a house.
Veteran investors may likely want to implement a tactic that will make the most out of asset appreciation since they may need this money until they retire. And people may desire to follow some investment tactics in their early 60s which makes the most out of income returns to increase social security income.
Fundamental Investing Rule #9: Identify Which Assets You Should Buy and Sell
Once a financial plan has been developed, one must follow the way the numerous assets will discharge in different macroeconomic situations.
Commodities and stocks constantly increase with a rising economy, but bonds constantly increase in a poor economy, andeach asset category’s performance varies from a business circle to the other, based on the supply and demand factors that trigger each circle and on ancient valuations when the particular investment was started.
Bonds re-group in the reverberations of a monetary catastrophe, as some investors sell commodities and stocks, as the case was in the monetary catastrophe of 2008. This implies that certain investors would have to branch out their investments, not only in stocks, but in asset categories as well, managing their asset allocations based on the course of the economy.
Fundamental Investing Rule #10: What Stocks You Should Buy and Sell
Once investors are able to figure out how to apportion their investments on different categories of assets, they can continue to the next step, for example, make a decision on which stocks they want to buy or sell.
We have 3 different schools of thought in this regard:
The technical school, which utilizes the trading charts to decide on the nature of the different stocks; the basic school, which utilizes the theories of the economy to decide on which stocks should be bought and sold; and the productivity hypothesis school, which affirms that investors should buy ETFs or mutual funds that detect the market index other than purchasing personal stocks.
Fundamental Investing Rule #11: Remain Focused:
Remaining focused has to do with 3 different things:
First, it has to do with keeping to priorities and objectives as specified in your monetary plan. Second, it has to do with keeping to the asset allocation that meets those priorities and objectives. Third, it has to do a lot with keeping to the choice of portfolio that also meets these priorities and objectives.
Manage your portfolio choice and asset apportionment in accordance with substitutions in microeconomic and macroeconomic situations, dependent on products that provide a benefit to an asset category on the other, or a stock on the other.
Fundamental Investing Rule #12: Keeping a Bright State of the Mind Going
People are both bright and psychological beings. As psychological people, they decide with the first System, which is an automatic technique that utilizes insights and psychology to decide which course of action to perform in retort to environmental stimulant and frequently utilizing shortcuts by presuming that the future reiterates the past.
As bright people, humans determine with the second System, a deliberate technique that utilizes in-depth computation planning and reason to reach a specific decision other than insights and psychology.
While unconventional, the first two Systems are part of theidentical brain, which apportions tasks productively to every system. The first System is commonly the first to retort to environment stimulant, bringing about beliefs and impressions. The second System constantly takes these beliefs and impressions for granted, and in nature, making the first System to retort to external stimulant.
Sometimes, though, the second System can get skeptical about information obtained from the first System, start evaluating extra data, and discuss a course of action that is totally different from the one mentioned by the first System. And that may bring about some rules to control the first System, as the case is when the first System perpetrates significant mistakes that give rise to detrimental character.
Keeping a bright state of the mind is simply about switching off the psychological buttons that position the first System and place it in control of the process of investing, and carrying out expensive essential mistakes. Come up with the right knowledgeable technique to investing; organize the appropriate investment plan; control investments tightly and lay down rules of investment; and branch out asset categories other than just part of asset categories.
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