Three Simple Tips for Investing Wisely
Your planning, goal setting and focus on a balanced life can result in you having money to invest. Mostly for long term goals like retirement, children’s education, a vacation home or others. Now comes the fun part. Making wise investment choices consistently and over a longer time period.
It can be done by following a strategy that includes:
- an assessment of your tolerance for risk
- diversification
- regular re-balancing
Risk Has It’s Rewards
Understanding the type and nature of risk is important. There are many components to the overall risk of an investment. This blog will not deal with them individually. Rather consider basic differences between stocks and bonds. Stocks give you the opportunity to grow wealth as the companies you buy are profitable. Bonds enable you to add to your wealth when the bonds pay dividends.
Stocks vs Bonds
Historically Stocks have returned about 10% per year and Bonds between 5-7% depending on the type. It would be easy to just say I’ll take the Stock return, but along with the higher average return comes a greater variation in return EACH YEAR; including a chance there will be a loss in value, not a gain.
Deciding on the percentage of your investible dollars you are willing to expose to a loss in any given year is the first step in determining your portfolio.
Diversify, Diversify, Diversify
Studies have shown that 91-94% of an investor’s return is determined by the ASSET CLASS, not the individual stock or bond. Think “buy technology” not Microsoft, Apple or Intel. Rather than trying to hit a home run with one stock, why not buy a little of several and settle for singles and doubles more consistently.
Along with Stock or Bond asset classes, there are several subsets: foreign or domestic, large, medium, or small companies, growth or value companies, passive or active strategies.
Did I mention utilizing a professional might be helpful?
Why Re-balance?
Re-balance means holding to your asset mix percentages so you maintain your risk tolerance. For example, if your risk plan is to have 20% US Large company growth stocks and that asset class has a big surge you will end up with a portfolio more at risk of losing in the future than you want.
Buy Low, Sell High
What do we do? We sell our asset class that has grown more than the others and buy asset classes that haven’t grown much. We sell winners and buy relative losers. Doing this regularly — at least annually — allows us to take profits and invest in asset classes that have yet to have their growth spurt. It also allows us to remain at the risk level we have chosen.