What is the KISS rule of investing? In this post we will review the KISS idea in relation to investing and what you should know about the popular phrase.
When it comes to successful investing, some essential rules can help you on the way. Yet, finding such helpful directions isn’t always easily done!
But one of the more commonplace that you may have heard referenced is the KISS rule of investing.
The KISS rule of investing is widely spoken about amongst those more experienced investors.
But, for those new to the investing scene, the mention of this can sound on first impressions rather bizarre.
Fortunately, this is one rule of investing that is actually simple but ultimately remains a highly practical one.
Helping to break it down, here we offer a bit of background on the investor’s rule of KISS.
We also look at how you can apply it to your specific investment activities to get the most benefits from it both short and long term.
What Does KISS Mean, and Where Did It Originate?
The KISS acronym stands for Keep it simple, stupid! Though not directly accredited to the investing world initially, it has been used for decades in this industry.
A phrase coined in the sixties, the KISS analogy originated in the U.S. Navy, of all places. It works based on simplicity being a key goal.
The idea is that most systems work effectively when kept simple instead of complicated.
Why Is the KISS Concept Used for Investing?
When the KISS acronym was taken and applied to the investing world, it was done to highlight diversification and risk. More so, the relationship that exists between these two.
Furthermore, it became the term often used by those new to the investing arena.
And, as a four-letter word that certainly makes you stop in your tracks, the simplicity of the phrase itself is often what makes it the most useful.
Likewise, it remains the more practical of rules to remember when applying to your own investing activity!
What Is the Kiss Rule of Investing?
By keeping it simple, stupid, KISS reminds you never to put your money to or in anything you have no understanding of.
It also emphasizes the fact that investing does not have to be a complex process.
Overall, it’s a valuable lesson for newbies to investing – and those who’ve been doing it for some time.
How to Apply Kiss to Your Own Investment Activities
As KISS is a guiding concept, there are perhaps several ways to choose to interpret it.
This is especially so when applying it to your individual investing activity.
Yet, some of it may apply to your unique circumstances; some may not. Either way, the aim here is to be practical and realistic while protecting your money.
Thus, here are just some of the most important rules when applying the KISS method of investing:
- Remember the two circumstances under which you should never invest.
You should never use borrowed money to invest. Neither should you invest purely to make tax savings.
- 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 are gold commodities and futures day trading.
- 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.
- Note the 6 main types of investments, including money markets, single stocks, bonds, mutual funds, real estate, and annuities.
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.
These are the ones with a rate of around 5%, and they are a terrible investment because they aren’t really fixed.
Do Your Homework the KISS Way
One of the crucial things to note with the KISS rule is to work with what you know. This is crucial when it comes to placing your money into investments.
This means being aware of potential new terms that you may have heard mentioned but have no personal experience.
A couple of terms mentioned above that demand you have a good grounding for investing include the following:
Diversification. Much is made of this term, and the reason is that it lowers the risk of investing in general.
To diversify your investment means to select a more comprehensive selection of assets and securities.
This means that you have it spread across the board rather than placing all your money on one.
Thus, should one venture fail or not do so well, you have several others in place to cushion such a blow.
Mutual Funds. Often spoken of in many investment topics, a mutual find is a pool of money.
These pools are usually managed by investment companies. These are also invested in many companies, bonds, and other viable financial areas.
The concept of a mutual fund is to provide an investor with variable foals that all depend on the funds and their investment charters.
The idea here is to generate income, or it can be used to preserve investor money.
You may also see them used regularly by those looking to invest in businesses that grow rapidly.
Liquidity. This refers to that of an asset’s ability to be permitted to quick cash conversions. That is, without the loss of value.
It also takes into consideration the availability of money. So, where there is more liquidity, there is usually less return as a result.
Share. A share is simply a piece of ownership. This can be in a company or a mutual find.
Risk: Risk refers to a degree of uncertainty. In investing terms, this is likely concentrated around an asset and its uncertainty of returns.
It refers more to the likelihood of encountering a loss or a reduction in profit in business terms.
Risk Return Ratio. This is the relationship of substantial reward when it is compared to that of the amount of risk taken.
Common Mistakes to Avoid When Implementing the Kiss Rule of Investing
Referring to the KISS method of investing centers mainly around the rules mentioned above.
Yet, there are also some other ways that you can add to this acronym and further ensure your successes, reducing any failures.
In fact, these ways are very closely related to the KISS analogy:
There is no room for lack of patience in investing
Having a lack of patience is often one reason many people take on investments that they don’t fully understand.
This is because they don’t have the endurance to sift through the terms and conditions or requirements involved.
Yet, successful investing requires a disciplined approach, which can only come from patience.
By practicing patience when investing, you will instantly make better decisions. This is because you’re open to listening and indeed waiting!
Being patient also requires you to keep your expectations realistic.
This means looking ahead and realizing the potential outcomes when it comes to length, time, and growth of your investments.
There is no room for favoritism in investing
Just as the KISS method encourages diversification, some investors always let their hearts rule their heads.
This is obvious in those who see their investment do well and then decide to continue to plough all their energy and money back into it.
At times like this, it’s worth telling yourself why you bought stock – as an investment!
Should the fundamental change here, as in profits begin to fall, you will need to push such feelings aside. This means you should always be ready to sell your stock.
There is no room for emotion in investing
Finally, to round off the KISS analogy perfectly, it’s worth considering how well you keep your emotions at bay when investing!
Many experts state emotion as the number one downfall when investing, emotions allow both fear and, of course, greed to overtake.
So, investing is not the time for irrational displays of behavior. Neither should you allow personal feelings to get in the way of your investment decisions.
To overcome this, you’ll need to focus your attention and energy on the bigger picture.
Though it sounds ironic when most investing changes day by day, returns should actually be considered as long-term issues.
Recapping the KISS Rule of Investing
A short and snappy term, but with the potential to change the way you invest for the better, the KISS concept recapped means:
- If you have the means, don’t wait to invest. Start now.
- Begin small and work your way up.
- Never place all your money in one investment.
- Spread your investment choices around to lower you risk
- If you don’t understand an investment – don’t put your money into it just yet!
- Do your homework on the investment in question. Suppose it’s too complicated for you to explain to others. In that case, it’s more than likely too problematic for you to succeed with.
- Educate yourself on finances and investments wherever and whenever possible.
- Be patient when investing!
- Building up an investment portfolio takes time, so does the wealth that comes with it.
- 10. Large-cap funds are those that include growth and income funds. They are also very stable
- 11. Mid-caps funds are those that are still growing and include growth funds.
- 12. Small-cap funds are those wilder of funds and include aggressive growth funds.
Final Thoughts on the KISS Rule of Investing
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.