Six Steps to a Winning Investment Portfolio
Markets throughout the world have a history of rewarding investors for the capital they supply. Companies compete with each other for investment capital, and millions of investors compete with each other to find the most attractive returns. This competition quickly drives prices to fair value, ensuring that no investor can expect greater returns without bearing greater risk.
Traditional managers strive to beat the market by taking advantage of pricing "mistakes" and attempting to predict the future. Too often, this proves costly and futile. Predictions go awry and managers miss the strong returns that markets provide by holding the wrong securities at the wrong time. Meanwhile, capital economies thrive–not because markets fail but because they succeed.
The futility of speculation is good news for the investor. It means that prices for public securities are fair and that differences in portfolio returns are explained by differences in the risk taken. It is possible to outperform markets, but not without accepting increased risk.
Risk Means Opportunity – Investors are rewarded in proportion to the risk they take. If you are willing to take more risk and have more invested in the stock markets, you will be rewarded with higher long term returns. If you are more risk averse and have more in bonds, you will have lower long term returns. Time frame is very important. Long term should be considered 10-20 years, or longer. Creating a portfolio allocation that is right for you given your circumstances and time horizons is critical to your investment success.
Diversification – Diversification enables investors to capture broad market forces while reducing the risk associated with individual securities. Research shows that you can reduce those factors in the portfolio that do not increase expected returns, and increase those factors that do increase expected returns.
Six Things to Do Now:
- Stay invested in the markets – If you are not in the market, you will not benefit when the markets rebound or generate positive returns.
- Diversify your portfolio – Be well diversified globally. Don’t hold too few securities or bet on countries or speculate on interest rate movements. Don’t follow market predictions.
- Keep investment expenses low – If there are two similar funds investing the same way, choose the less expensive fund. We prefer low cost index funds and exchange traded funds.
- Determine your appropriate asset allocation – because no two investors are alike, there is no single "optimal" asset allocation. Each investor has his or her own risk tolerances, goals, and life circumstances that dictate the holdings in their portfolios. The greater the proportion of stocks a portfolio holds, especially small cap and value stocks, the more "aggressive" is its risk and the greater is its expected return.
- Maintain an appropriate liquidity. This can be through the maintenance of an emergency fund, bond ladder, or fixed income portfolio. You want to know that you have the funds available when they are needed.
- ebalance. When prices go up, trim some of those holdings that have done well, and buy more of those that are "on sale". This is a disciplined process that enables you to sell when prices are high and buy when prices are low. Review your portfolio at least annually for rebalancing opportunities.
We challenge you to follow these six steps and experience a much better investment experience.
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