Building wealth over time isn’t something that’s exclusive to the super-rich. Even if you can’t afford a luxurious lifestyle, it’s still possible to accumulate some decent assets if you’re smart about what you do with your money. Taking a page out of the investing playbooks of the 1% is a step in the right direction and there are some basic rules the wealthiest investors swear by.
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Rule #1: Don’t Put all Your Eggs in One Basket
Investing always comes with a certain degree of risk and one of the best ways to hedge your bets is to mix things up in your portfolio. One-percenters know that sinking all of their money into a single type of investment exposes them to the highest level of risk. So they often make sure to keep their portfolios balanced at all times.
Diversifying doesn’t mean you have to totally revamp your investing strategy. If you’re partial to mutual funds, for example, it can be as simple as choosing funds in different asset classes. The bottom line: The more diverse your portfolio is, the more your investments will balance each other out in terms of risk.
Rule #2: Know Thyself
For the wealthiest investors, success doesn’t come from getting lucky in the market or jumping on a deal at the right time. Instead, it’s all about knowing what kind of risk they can tolerate and what their long-term goals are. Because netting bigger rewards often means taking more of a gamble with your investments, it’s important to be aware of the degree of risk you’re comfortable taking on.
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Rule #3: Put a Cap on Fees
Raking in huge returns won’t do you any good if you’re handing them back over in the form of fees. High net worth investors don’t jump into an investment without first considering how much it could cost them in terms of management fees and taxes.
Rule #4: Go With the Flow
If 2008 taught us anything it’s that the stock market is fickle and there are going to be times when your investments aren’t going to perform as well as you’d like them to. For every dip, there’s a rebound and the 1% crowd doesn’t panic when stocks slide. Adopting that same cool-under-pressure attitude can help you weather the storm when the market gets bumpy.
Rule #5: Ditch the Get-Rich-Quick Mentality
Building wealth isn’t something you can do overnight. Warren Buffett didn’t become a billionaire by banking on the next big thing. Instead, his investing strategy is all about long-term value and it’s that kind of forward thinking that has helped him amass such enormous wealth.
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Adopting that same attitude is necessary if you’re committed to mastering the investment game. Instead of hoping to hit it big by discovering the next Google, it’s best to look at where the market is as a whole and choose investments that have the best potential for generating a steady rate of return.
The Rule of 72 is a very easy to way to figure out a realistic time frame for you to reach your desired investment goals within.
Knowledge Is Key
The wealthiest investors didn’t earn that title out of sheer luck. They’re constantly studying the market and they know their investments inside and out. Whether you’re new to investing or you’ve been at it for a while, doing your homework is an essential piece of the puzzle that you can’t afford to neglect.
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