The KISS rule of investing is the phrase Keep It Simple, Stupid. or in short KISS.
For the untrained or beginner investor, the word Kiss in relation to investing and finance might sound weird and out of place. But for seasoned investors and financial advisors this is a term that is wildly used and understood immediately.
Let’s explore the meaning of it in more detail, and learn where it all started and how to use it effectively.
Where did the KISS acronym started
The KISS phrase was actually started in the US Navy back in the 60s. It was used by soldiers to emphasis the importance of simplicity as an objective. Later on it started popping up in other industries until it found its way into the investment and finance sectors.
The idea behind the term sits well with financial industries as in a lot of cases, keeping things as simple as possible is the best way to go about investing.
How does the KISS rule apply to investing
The purpose of the KISS rule in the investment world is to remind the people who work in the field that the best systems are usually very simple. You don’t need sophisticated plans and work to create great things.
Most of the time, the simplest plan will work the best long term and will be easier to maintain and teach.
Another thing to remember is that while the financial world might be complicated and hard to understand to most people, it is the people who work in the field that sometimes get caught up in their own hype and over-complicate things with no real reason.
So the rule is basically a guideline for investment workers to NOT do things they do not have a full understanding in themselves, and just keeping it simple as long as they can show profit.
Interpretation in the finance world
Over the years, people took from the rule what they needed to make it work in their field, for some it could mean a little bit different things than to you or someone in the finance world would use it differently than someone in sports.
In the investment world, KISS often relates to diversification, meaning the act of not putting all your money in one basket, or one financial vehicle, and try and spread it out across a few different ways so that you can try and protect it in case one of the methods you choose go against you.
How to Apply Kiss to Your Own Investment Activities
While as we mentioned in different fields people may choose to think of the KISS concept differently than in the investing world, below are some of the guiding principles to take into consideration:
- Remember the two circumstances under which you should never invest.
You should be careful when using borrowed money to invest. You should know the risk well before deciding to borrow money to invest in something.
- Work on diversification when investing.
Understand what it means to diversify your stocks. That saying, never place all your eggs in one basket is exactly where diversification refers to.
Thus, make sure you spread your stock around. This will help you lower the risk factor.
- Remember that there is always a risk involved in investing.
But when the risk goes up, so too does the potential for return. This is true for virtually all investment types.
- Understand liquidity and its repercussions.
Liquidity refers to availability. Thus, the more liquidity, typically the less return.
- Know what the horrible investments are and steer clear of them.
These could be different for each person, based on your understanding and knowledge. if you don’t understand something, it is probably a high risk investment for you.
- Learn about the investment types available.
This includes finding out what risks they carry and how you get a return on your profit from such ventures. It’s also worth remembering here that there is more than one investment type to suit your circumstances.
The 6 main types of investments:
|Money Markets||Mutual funds|
|Single stocks||Real estate|
1. Money Markets – These tend to be lower-risk options. Ideal for those emergency funds, they offer check writing privileges.
Most often used here is a C.D. This is a certificate of deposit, which is typically from a bank.
2. Single stocks – These are those investments that carry with them a higher degree of risk.
By buying stock, you buy a piece of the company in question, that is, a form of ownership.
To see a return here, the company will have to see an increase in their profits to give you your dividends.
3. Bonds – These are known as debt instruments. This means that the company will owe you money.
The fluctuation between price and interest is your return. It is worth noting that single bond purchases are where most people don’t see much in the way of returns on.
4. Mutual funds – These work by investors pooling their money in to invest. The pool or fund is then managed by a portfolio manager.
To get your return, the value of such finds will need to increase. These fund types are considered by many as good long-term investment options.
5. Real estate – To use real estate as a means of investment, you’ll need to have lots of cash! This method, in investing terms, is considered the least liquid of consumer investments.
6. Annuities – These are savings accounts with insurance companies. Again though, be aware of those low interest fixed annuities here.
Now that you’re armed with a fantastic analogy, the KISS rule should help you immensely as you look to invest.
Keeping it simple and not taking stupid risks or decisions makes it possible to establish a good pattern and career path from investing.
With the right plan of action, some of your own cash to begin, and a practical mind to the possibilities, both the good and bad of investing, you stand a better stance than those who discard all common sense when it comes to investing.
If you enjoyed this guide, here is a great related guide about the benefit of purchasing a saving bond you can learn from.