Though nothing earth-shattering appears to have come from the NASDAQ outage of August 22, 2013, it was a lesson of what can and could happen in today’s high-tech, fast-paced stock market. When the NASDAQ shut down trading for three hours, I wasn’t panicking; I was watching with subdued interest, more curious than frightened. This wasn’t because I don’t have money invested in the stock market, I do. However, my investments and investing strategies are governed by three simple rules that allow me to breath easy when it comes to a variety of unstable economic and financial situations.
Rule #1: Don’t invest more than you can afford to lose
Most investors will take a chance with their money at some point in their life. This doesn’t mean however that it has to constantly be at risk or at risk in the amounts that could make or break your financial world.
I have money invested in the stock market through my IRA, and frankly, I don’t want to lose it. However, I could afford to do so without changing our family’s lifestyle or living situation. Therefore, my rule is to try to limit our exposure in any single asset area. To do this, I never try to put more than 25 percent of our assets into any particular investment, and I prefer to limit our holdings to closer to the 10 to 15 percent range. This means that even if a particular investment fails completely, we’re not left without options and opportunities to recoup it in other areas.
Rule #2: Don’t put all your eggs in one basket
Another way to say “don’t put all your eggs in one basket” is simply to say “diversify”. I’ve never been a fan of putting all my investments in one place. I feel that spreading investment options out over cash, stocks, bonds, commodities, real estate, and other investment options is the best way to broaden the ability to weather a variety of financial storms. Not only this, but I feel that by moving outside the more intangible — things like stocks, ETFs, bonds, REITs, and paper commodities — into things like actual physical commodities like silver and gold, real estate like land and rental properties, assets like antiques and collectibles, and other items that can actually be controlled (rather than having an investment firm control them) is another good way not only to diversify the type of investment but the form as well.
In my opinion, diversifying in these ways puts some of the ability to maintain more control over investments back into the hands of the actual investor.
Rule #3: Remain debt-free
Losing a large chunk of money in the stock market could be devastating if you’re counting on that money for other things or had an extremely high cost of living. However, by keeping debt-free, you may be relieved of some of the stress that comes along with investing.
In our particular situation, knowing that we have no credit card debt, that student loans are paid off, and that we don’t have a mortgage, the success of our investments aren’t as crucial in the near-term since we aren’t relying on that money for any immediate needs. By keeping debt down and lifestyle costs low, we have fewer obligations for our money, and we can afford to lose some of it in a market debacle (with hopes of eventually gaining it back of course) should it occur, without it being a huge concern.
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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.