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Golden rules for investing

Aug 10, 2008

  1. Market timing – whilst it is impossible to predict the market lows, the greatest returns in sharemarket history are made when you can pick the share price at its lowest. Buy low, sell high
  2. Time in the market – if you bought when the sharemarket was higher, then an important maxim is to stay in the market and don’t panic. Generally in the market, what goes down will invariably go up over time.
  3. Don’t have all your eggs in one basket – the risk of losing all your money in the sharemarket actually reduces the more stocks you have via diversification. But don’t have more than say 15 stocks because the brokerage costs will start outweighing the marginal benefits.
  4. Pick quality stocks – when markets fall we often see that some great stocks have been reduced too much and are actual at a discounted price. I have seen too many people lose money on speculative stocks than make money on them.
  5. Dollar cost averaging – don’t buy 100% of your portfolio on the one day. Spread it out over a number of months to avoid the problems associated with market volatility.
  6. Fully franked shares – companies that pay fully franked dividends are provide a better after tax yield than those that pay unfranked because you get a credit of 30% company tax already paid. It means that those earning less than $80,000 effectively get dividends tax free.
  7. Borrowing – for a borrowing strategy to work, you need to get a return greater than the cost of the interest rate that you are paying. Otherwise you are falling further behind. Excellent strategy to consider in a rising market and the interest is tax deductible.

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