Dipping your toe in the water

You never make or lose money until you sell your shares

Shares fluctuate in value, so you need to be mentally prepared for times when, on paper, some or all your shares are worth less than what you paid for them.

Good investors have a plan and stick with it 

If the value of your shares is dropping by the day (think financial crisis), it’s very hard to fight the urge to sell up and get your money out of the share markets while you can… Even if it means you wind up with less than what you started with.

The fifth rule of investing is to make an investment plan and stick with it. Even if it means NOT checking the value of your shares for months on end. We’ve said it before and we’ll say it again, logic is only part of the picture. When you are investing for the long term, one of your biggest challenges can be keeping your emotions in check.

There are a couple of different approaches to investing

Buy and hold

Some investors have a ‘set and forget’ plan, where they have a diversified selection of shares and then keep investing in those same shares at regular intervals. They might review and update their plan once in a while but otherwise ignore the short term ups and downs.

Actively trade

Some people try to make money by trading shares regularly. They try to profit off the short term fluctuations by buying shares when they drop in price, and selling when they increase. These investors often monitor share prices up to several times a day (or more!).

A combo!

There are pros and cons to both approaches. Actively trading can be a good way to learn, make a quick buck and get out of bad investments fast... But it can be far more time consuming and evidence suggests that it might not end up being profitable for most people.

On the other hand, 'set & forget' may feel boring, but it does help most investors keep their emotions in check and grow their wealth in the long run.  

Because nothing in investing is all or nothing, many investors just do a bit of both.

A good portfolio is a diversified one, but how you get there is up to you!

There is one more factor that investors need to keep in mind when choosing their investment mix: Fees.

Rule six: Don’t let fees gobble up your investment

There are generally three types of fees when you invest in the share markets:

1. Foreign Exchange fees: If you invest outside NZ, your money needs to be exchanged into another currency. Different foreign exchange dealers offer different rates, so it’s good to compare options… But there’s no way to avoid them.
2. Trading fees: Usually when you buy or sell shares, you pay a brokerage fee; this is the fee charged when you place a trade, for your broker to match your order with others. These differ from one broker to another.
3. Fund fees (for ETFs): Most fund managers charge a small annual fee to cover the costs of managing each ETF. These also vary wildly and we’ll cover them in more detail tomorrow (forgotten what ETFs are? Refresh your memory here)

ETFs give you more diversification for lower fees 

Many investors start out with a budget of $100-500, so have to keep fees top of mind. To buy shares in 20 individual companies through Hatch, and keep to the 5% rule, you’d pay $60 USD in trade fees. However, if you invested in one ETF, you would only pay $3 USD and have a small slice of tens or hundreds of companies.

Don’t let fees put you off investing

Most investors put a strong emphasis on reducing their fees, but they’re unavoidable to some extent. You can’t earn if you don’t buy, and typically buying comes with fees. One way to think about it, though, is that if you buy a fraction of a share through Hatch, you pay $3 USD in fees, which means you’re spending less than the cost of a cup of coffee to start building your financial future.